What type of risk might an ADR holder face when receiving dividends?

An American Depositary Receipt (ADR) holder may face currency risk and political risk when receiving dividends. ADRs represent shares of foreign companies traded on U.S. exchanges, and the dividends paid to ADR holders are typically denominated in the local currency of the foreign company. Therefore, if the value of that currency decreases relative to the U.S. dollar, the amount of dividends received in dollar terms will also decrease, which illustrates currency risk.

Political risk is also a factor because changes in the political environment of the country in which the foreign company operates can affect its financial performance and ability to declare and pay dividends. Political instability, government regulation changes, or other geopolitical events can influence both the value of the dividends and the operational capability of the company to generate profits. This makes it essential for ADR holders to consider both currency and political risks when evaluating their investments.

The other options do not fully encompass the primary risks associated with dividends from ADRs. Market risk pertains to the broader movements in the stock market, increased interest rates affect borrowing costs and generally market conditions, while increased market volatility risk relates to fluctuations in the market as a whole. However, these do not specifically address the unique considerations tied directly to the nature of ADR dividends.