An ADR should be worth almost exactly what the underlying foreign shares are worth, converted into dollars. Enter the home-market price, the exchange rate and the ADR ratio to see the implied ADR price. Add the actual ADR quote to see any premium or discount.
How the conversion works
The formula is simple: implied ADR price = home share price × exchange rate × shares per ADR. Working backward, the home price implied by an ADR quote is the ADR price divided by (exchange rate × shares per ADR).
Worked example
A Japanese company trades at ¥2,850 in Tokyo. One yen buys $0.0066, and each ADR represents 10 shares. The implied ADR price is 2,850 × 0.0066 × 10 = $188.10. If the ADR is quoted at $188.40, it trades about 0.16% above its home value, a normal gap.
Reading a premium or discount
For a liquid, exchange-listed ADR the gap is usually tiny, because brokers can create new ADRs or cancel existing ones whenever the prices drift apart. A larger gap usually means one of three things:
- Stale prices. If Tokyo or London closed hours ago, the home price you entered is old news. Compare prices taken at the same moment.
- The wrong ratio. Ratios change after splits and ratio adjustments. Confirm the current ratio with the depositary bank.
- An illiquid ADR. Thinly traded OTC ADRs can sit away from fair value for a while. See how OTC foreign stocks trade.
For the full explanation of ratios, see ADR ratios and pricing.
Common questions
Why doesn't my ADR price exactly match the home price times the exchange rate?
Small gaps come from timing (the home market may be closed while New York trades), the bid-ask spread, and the FX rate used. Arbitrage by large traders keeps liquid ADRs within a fraction of a percent of fair value; illiquid OTC ADRs can drift further.
Where do I find an ADR's ratio?
The depositary bank publishes it on its ADR directory page, and it appears in the company's Form 20-F and the depositary's Form F-6 filing with the SEC.
Sources
Educational content only, not investment, tax or legal advice. The Stateside Report does not recommend buying or selling any security. Tax rules depend on your situation; confirm with a qualified tax professional. Full disclosures.