Dear Mr. Tan,
About three months ago, I was persuaded to buy a dual currency deposit. It was for the Japanese Yen. I wanted to buy Japanese Yen as I saw that it was rising. I was persuaded to pair it with Singapore dollar and given 18.2%.
I took it and eventually when it matured two weeks later, I got back Singapore dollars. Based on your calculations, would it be better for me to buy yen straight? My gut feeling was that I faced unlimited downside risk and was deprived of unlimited upside gain for a small return since it was only two weeks interest.
I will not go for a dual currency deposit in the future.
REPLY:
I am not sure if your 18.2% quoted is correct. If so, then you earn 0.7% for 2 weeks (i.e. 18.2% * 2 / 52 weeks).
If you have invested in the Yen directly, you could have earn 2% to 5% for the period, if the Yen had appreciated significantly. If the Yen had depreciated 2% to 5%, you would have taken the entire loss.
I would not take the risk of a large loss (say 2% to 5%), for a limited gain, i.e. 0.7% for 2 weeks?
I have been doing dual currency investments for 2-3 years as I have a need for a particular foreign currency.
ReplyDeleteDCI allows one to earn a higher interest rate while waiting to get converted to a foreign currency at a more favourable exchange rate (by setting a strike price which is lower than the spot exchange rate). Of course, if the spot exchange rate drops below the agreed strike price, one will "lose out".
One needs a medium to long-term investment horizon when going into dual currency investments so that if one gets converted into the alternate foreign currency (assuming this is NOT desired), one can do another round of DCI to convert back to SGD.
The interest rate quoted can be quite high (eg. 18%) as it contains an "option premium" (it is higher when the volatility index shoots up like in August 2007) over and above the fixed deposit rate.
Interest rate is higher the closer one strikes to the spot rate. So double digit interest rate is not uncommon.
ReplyDeleteThe 18.2% rate is correct. I was attracted by such a high interest rate. On hindsight, it was just 0.7%. So it seems that the manipulation by numbers can mislead people like me who are not too good with numbers.
ReplyDelete