Types of risk for stock investing

Question

Question:

We suppose that the Toyota is traded in Tokyo in Japanese yen and represented by the price process $(S_t)$ t≥0, and in New York in US dollars and represented by the price process $(U_t)$ t≥0.

What are the sources of risk faced by an American investor who has bought the Toyota stock in New York at the price Ut?

My attempt:

Market Risk - Toyota share pricing falling Systemic Risk - Collapse of entire financial system Liquidity risk - Not being able to exit position

Just wanted to check that there is not any FX risk here, as the US investor has bought $ donimated stock, so it is irrelevant that Toyota is also traded in Japanese markets in Yen.

Answer 1

Just wanted to check that there is not any FX risk here, as the US investor has bought $ donimated stock, so it is irrelevant that Toyota is also traded in Japanese markets in Yen.

An American investor stills has currency risk. A simple way of thinking about it might be to consider what would happen if Toyota share price went up 1% but USD declined by 1% vs JPY. The US ADR (American Depository Receipt--this is what is listed in the US and what the American investor buys in your example) will not move the same way as it's Tokyo traded counterpart would because of the currency fluctuation baked into the ADR. On the flip side, if the American investor bought the ADR and the USD appreciated vs JPY the American investor could outperform the Japanese listed stock.

EDIT: After posting an answer I did a quick search of SE and saw that this question has already been asked and answered here as well: https://money.stackexchange.com/questions/22309/am-i-exposed-to-currency-risk-when-i-invest-in-shares-of-a-foreign-company-that