Global Depository Receipt (GDR) Conversion and Exchange Rate in Egypt
Research Publish Journal, Vol. 4, No. 1, 2016
33 Pages Posted: 25 May 2016 Last revised: 21 Jun 2016
Date Written: April 1, 2016
The purpose of this study is to test the relationship between GDR Conversion in the Egyptian Stock Market and the USD Exchange Rate. Our study is mainly motivated by the paucity of similar studies in context of MENA capital markets and in most other emerging markets.
Lately, a problem aroused in the availability of the foreign currencies in the Egyptian Market which made difficulties to foreign investors to repatriate their investment proceeds to their home country, so it became a common tool nowadays that foreign investors to purchase one of the stocks from the Egyptian Exchange that can be converted to GDRs traded in London Exchange, then sell them in London Exchange for US Dollars, so they can repatriate their funds more quickly than stacking in a very long queue in banks due to the lack of foreign currency.
This mechanism increased the demand of these stocks in the Egyptian Stock Market (pushing their prices up) in the same time increased the supply of the GDRs corresponding to those shares in London Stock Exchange (pulling their prices down) which created a gap between the two prices leading to increase the USD Exchange Rate in these transaction (spread around 26% above the official Exchange Rate).
There are 14 stocks in the Egyptian Stock Market that can be converted to GDRs, we selected one of them "Edita Food Industries" and tested the relation between Local Share price and USD Exchange Rate which resulted in a strong direct relationship, also we tested the relation between GDR price and USD Exchange Rate which resulted in a moderate negative relationship.
Keywords: GDR Conversion, Exchange Rate, Arbitrage, Repatriation, Egyptian Stock Exchange, Market Efficiency, Egypt
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