The procedure consists of a bank or institution buying a share of a company listed abroad (for example: Google or Apple) and issuing a certificate that will be listed on the local market, replicating the evolution of these titles abroad.
In practice, buying a CEDEAR is the same as buying a share, since it is a variable income instrument, whose price varies constantly due to market supply and demand. Although in this case, the value also moves due to other factors that are important to take into account.
However, a CEDEAR is not always equivalent to exactly one share that, for example, is listed on the NYSE. There are equivalence ratios when comparing local prices with their price in the market of origin. This is due to the fact that many prices in the international market are very high and if we changed those prices to pesos, very few could have access. For example, the value of an Amazon share on the international market is approximately $2,960. If you multiply that number by the value of the current CCL, the price in pesos would be quite unaffordable for most investors. Therefore, in the case of Amazon, the conversion ratio is 144:1, this means that the stock is divided into 144 CEDEARs.
For their part, the CEDEARs are exchangeable for the underlying shares, accessing (at the corresponding ratio) securities abroad. In other words, if we have 100 CEDEARs purchased from Amazon and we want to convert them into a share, we will have to buy the remaining 44 CEDEARs and then exchange them for the share in the international market.
The advantage of the CEDEARs is that we can invest in a wide variety of international companies, at a very low cost and most importantly, we can do so in pesos, in MEP dollars or in Cable dollars. In other words, they can be bought both in pesos and in dollars, although it is often convenient to do so with pesos due to their greater liquidity. In addition, in this way we would be implicitly dollarizing, since an instrument is entered in pesos that is tied to the dollar price and that in the future could also be sold in that currency.
On the other hand, although the price of the CEDEAR, like any instrument listed on the Stock Exchange, depends directly on the free interaction between supply and demand, its price is also related to three factors: the price of the share in its market of origin, the implicit dollar price (CCL) and its conversion ratio.
Being a representative certificate and directly associated with the share listed on the foreign market, the variations of that share will cause the variation of your CEDEAR. On the other hand, any movement of the CCL will also have a direct impact on the price of the CEDEAR.
What happens when the dollar increases and also the value of the underlying? The price of CEDEAR will increase considerably, surely the percentage increase will be much higher than that of the share in the international market. The same thing, but in reverse, will happen when both the dollar and the underlying have falls in value.
And when the price of the dollar rises and the price of the underlying asset falls or vice versa, the value of the CEDEAR will depend above all on the supply and demand in the local market, but its variation will have great volatility.
What is the best scenario for a CEDEARs investor? That the price of the dollar falls or remains constant and the value of the share in the international market increases. This will cause the price of the CEDEAR in pesos not to vary much, it may even fall a little, but the price in dollars will be higher and higher.
To give an example, suppose we buy five CEDEARs from Apple at $3,390 each at a time when the price of that CEDEAR in cable dollars is $17.55, resulting in a CCL of $193 (3,390 / 17.55) . The value of the CEDEAR in CCL dollars basically arises from dividing the price of the share in its home market by the conversion ratio of the CEDEAR, which in the case of Apple is 10:1. However, the value will not always be the same, since local supply and demand also have a great impact on its price.
Going back to the example, in pesos the total investment is $16,950 (3,390 x 5) or $87.75 (17.55 x 5) if we decide to sell in dollars at that time.
Now, let’s imagine that the value of Apple’s share in the United States is increasing, but the CCL dollar in the local market is declining. Therefore, the value of the CEDEAR in cable dollars will increase following the underlying stock, let’s say US$18, but in pesos its price may have dropped to $3,200. This results in a CCL of $177.8 (3,200 / 18).
So at this moment, the total value of our CEDEARs in pesos is $16,000, we lost with respect to the initial investment, but in dollars our holding is US$90. We earned in that currency. For this reason, we say that it is the best scenario, because, although the price in pesos does not have winning movements, we are going to be winning in dollars.
PPI Digital Banking Team Leader.
Source: Ambito
