Hi Mr Tan,
I like to ask about Foreign Currency Time Deposits.
What are the risks involved if I put my money in Foreign Currency Time Deposits?
The risk is in the currency exchange rate.
For example, if you put $10,000 in New Zealand dollars for 1 year to earn 7% interest (compared to 2% in fixed deposit in S$), you will earn 5% more in the interest for 1 year.
At the end of 1 year, if the NZ$ depreciated by 5% against the S$ during the 1 year period, you are in a neutral position (compared to keeping in S$ deposit).
If NZ$ depreciates by more than 5%, then you will lose on the NZ$ deposit.
If NZ$ depreciates by less than 5%, you will still be better off, by investing in NZ$ deposit.
If NZ$ appreciates against the S$, you will get double benefit, first from the higher interest rate (i.e. difference of 5%) and second from the higher exchange rate.
The challenge is to know what is the likely trend of the NZ$. No one can help you to make this decision. The currency experts do not know, especially in 1 year's time. I do not know.
If you study the trend of NZ$ over the past few years, you will find that it has the potential to move up or down 10% within a short period.
The same remark applies to investing in any other foreign currency deposit.
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