Thursday, March 22, 2007

Analysis of a "currency linked" investment

I have the option to make the following investment of $1 million:

a) 1 m in SGD deposit : 2.9%pa (interest : $2,383 per month )
b) 1 m in USD deposit @ 1.53 = USD 653,594 @ 4.9%pa (interest: USD 2632 per month )
c) currency-linked investment: 1 million SGD/ USD : strike at 1.5240, 5% p.a. (USD 656,168, interest USD 2,696)

The interest rate between (b) and (c) is only 0.1% difference. If USD falls by 2%, I face the loss. If it gains by 2%, the bank gives me only 0.4% (difference between 1.524 and 1.53) and keeps the difference of 1.6%. I have decided NOT to buy the "currency linked" investment.

If I wish to invest in USD, it is better to take the straight forward deposit, ie (b) above. Do not invest in (c).
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4 comments:

Sentosa Gani said...

The think with c is that, your capital value is guaranteed with 5%, where as for b) part, you might get something less by the end of the month (depending on currency fluctuation).

March 23, 2007 12:40 AM
Anonymous said...

both (b) and (c) options are exposed to currency risk.

The long term direction of USD is going to be downwards due to the twin US deficits (record breaking current account deficit and budget supported by Other Central Banks, such as China and Japan, buying of US treasury bills. China, with a foreign reserve of US$ 1 trillion, has recently announced that it does not want to accumulate any more US treasure bills.

Avoid US$ explosure.

March 24, 2007 11:48 AM
Anonymous said...

I am very disappointed with DBS. They recently tried to get my dad to do some sort of currency link thing. Long story short I told my dad not to do it. The AUD hit 99c to USD and if we did the currency link 50% would be converted to USD. Then we would have lost on the bank spread converting it back to AUD to get interest since USD now is more or less zero interest. DBS offered 9% interest instead of 4.5% or so if we did the currency link. This super high interest rate was what made me suspicious, I think they needed to hedge against AUD going up or who knows what. If anyone can clarify what the heck is going on I would appreciate it. We have been loyal depositors of a few hundred K AUD term deposits with DBS. Why would they want to disappoint or risk losing our business? Is our amount not high enough and too "retail investor" for their concern?

October 12, 2010 7:40 PM
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April 15, 2020 6:26 PM

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