Global Depository Receipts (GDR) and convertible bonds Law of Intl Essay

Global Depository Receipts (GDR) and convertible bonds Law of Intl Finance - Essay Example DRs offer a number of benefits to investors seeking to diversify internationally. DRs greatly facilitate trading in foreign securities by reducing the risk of fraud. While foreign companies shares typically are written in the language of the issuer, DRs are usually issued in the language of the issuing agent. DRs are legal obligations of the issuing agent and not of the firm that issued the stock. Thus, the risk of falling prey of bogus certificates is eliminated. As such, DRs overcome many of the obstacles that mutual funds, pension funds, and other financial institutions have in investing and holding securities outside the homeland. (Geiders 1997, cited in Webster, 1998, p. 2). DRs are also convenient. Securities do not have to be delivered through international mail, prices are quoted in pounds or U.S. dollars, and pay dividends or interest in the home currency. In fact, the prices of a number of foreign stocks routinely are reported in the financial press. Importantly, global cus todian safekeeping charges associated with purchasing foreign securities are eliminated, which could save the investor as much as 40 basis points annually. (Webster, 1998) An important function of DRs is that they enable foreign firms to raise capital in the most lucrative markets for investment capital such as Great Britain and United States. Listing shares directly on UK or U.S. stock exchanges, however, is problematic, Disclosure requirements are among the strictest in the world. Foreign firms also face significant costs producing UK or U.S.-style financial statements. DRs provide foreign firms with a way around these listing problems. While the potential benefits of direct foreign investment are connected to overseas diversification the potential disadvantages to investing in DRs also are communicated by overseas diversification risks: fluctuating currency values, lower liquidity, and foreign tax liability. Fluctuating currency values. An investor does not have to exchange currency to purchase DRs, but DR prices are still influenced by fluctuating currency values. Since the pricing of DRs reflects the UK pounds value of a foreign security currency movements will work to an investor's advantage when the foreign country's currency drops in value in relation to the UK currency. But the opposite also is true. The value of DRs will drop when the foreign currency increases in value against the UK pound of sterlings. Overall, DRs still tend to track with the performance of their corresponding foreign securities. Lower liquidity. Most DRs are not as actively traded as foreign shares that are traded directly As a result, DRs may not be as easy to liquidate. Brokers that specialize in trading DRs, however, can liquidate them by instructing the foreign custodian to sell the underlying securities. Foreign tax liability. Although DRs pay dividends in pounds, these payments represent conversions of foreign dividends paid to a custodian on the underlying securities. As a result, DR holders must pay foreign taxes on these dividends. Although many DRs are considered highly