Today, the stock price of Genevo Company (based in Switzerland) is priced at SF8

Question

Today, the stock price of Genevo Company (based in Switzerland) is priced at SF80 per share. The spot rate of the Swiss franc (SF) is $.70. During the next year, you expect that the stock price of Genevo Company will decline by 3%. You also expect that the Swiss franc will depreciate against the U.S. dollar by 8% during the next year. You own American depository receipts (ADRs) that represent Genevo stock. Each share that you own represents one share of the stock traded on the Swiss stock exchange. What is the estimated value of the ADR per share in one year?

Explanation / Answer

Current stock price of Genevo Company = SF80

Current Exchange rate = $0.70 / SF

Current value of stock in dollar term = SF80 × $0.70

                                                            = $56

Current value of stock in dollar term is $56. Currently each share of ADR represent one share of ADR. So current value of ADR for one share is $56.

After one year

Stock Price Decline by 3% then stock price after one year is calculated below:

Stock Price = SF80 × (1 – 3%)

                   = SF77.60.

Stock price after one year is SF77.60.

Also

SF will depreciate against dollar by 8%. So value of SF after one year for one dollar is calculated below:

Exchange rate = $0.70 / SF × (1 - 8%)

                        = $0.644

Exchange rate after one year will be $0.644.

Now value of Stock after one year = SF77.60 × 0.644

                                                        = SF49.9744

Value of stock after one year will be SF49.9744.

So estimated value of ADR per share after one year will share price of Genevo company whih is SF49.9744.

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