Tan Kin Lian's Blog: Dual Currency Investment

Thursday, July 31, 2008

Dual Currency Investment

A consumer was persuaded by the bank to invest in a linked-currency product, or also called a dual currency investment. It is explained in this FAQ:
http://www.tankinlian.com/faq/duali.html

He asked me to explain why this product is to the disdvantage of the consumer.

The actual product is quite complex, so it is not easy to understand, and not easy to explain. It involves the use of spot rate and target rate, and the practice or terminology may differ from one bank to another.

I will give a simplified example. Suppose you have SGD 100,000. If you keep it on 1 month deposit, you can earn interest rate of 1.2% p.a. If you buy a AUD-linked product, you may earn say interest at 6% p.a. The difference of 4.8% in interest rate will give you 0.4% for one month.

Suppose that there is a 50% chance that AUD will appreciate by 1% in a month, and 50% chance that it will depreciate by 1%.

If AUD appreciates by 1%, you will not get this gain as you have already been paid the additional 0.4% interest. If AUD depreciates by 1%, you have suffered a loss of 0.6% (after deducting the additional interest of 0.4%).

Why face the risk of losing 0.6%, when your gain is only 0.4% with similar probability?

In real life, there is a risk of making a larger loss of more than 1%. The currency could depreciate by 5% in a month. You will suffer the risk of this large loss, without the benefit of a similar gain, as your actual gain is capped at 0.4%.

The bank officer tells you, "If AUD drops, you can keep AUD and wait for it to recover." This is a misleading advice. You have actually suffered a loss and if you keep it longer, you suffer the risk of a bigger loss.

Look at it from another angle. Due to the arrangement, you had to buy AUD at the earlier price when you could buy it 1 month later at 1% less. So, you have suffered a loss of 1% on AUD and after deducting the 0.4% additional interest, the net loss is 0.6%.

Conclusion: The terms of the dual currency investment are set by the bank in their favor. These terms are usually unfavorable to the consumer. It is best to avoid this type of structured product, as they are structured to your disadvantage.

9 comments:

LivingRoom said...: Thanks for the advice ! Now we know that the product is structured to our disadvantage. Not worth putting our hard earned money there !; July 31, 2008 6:50 AM
Vitali Zagorodnov said...: I think this is exactly what X Bank officer was trying to pitch me last time I was inquiring about AUD deposit account. It sounded so complicated that I had to stop her and specify that I just want a simple account denominated in AUD and earning fixed deposit rates in Australia.; August 04, 2008 10:08 AM
Anonymous said...: Hi Mr Tan, I am 1 of the investor in DCI. My Base currency (MYR) has been stucked in AUD at 2.98. And the AUD is keep falling now. Can you please advise me on what to do next? Im worrying that AUD will keep falling till below 2.50.; May 19, 2010 10:53 PM
Anonymous said...: Hi Mr Tan,

I am fresh graduate who just joined an internationaI private bank. I came across your blog while I was searching DCC's explanation on Yahoo. Your explanation on DCC gave me alot of insights into this product and has helped me undersand this product in a deeper sense.

While I have read alot of DCC explanation and definitions from the web, I have to say yours is much original and written in an easy-to-understand language.

Indeed, I still have some puzzles in my head regarding this product. I am hoping if you can help me?

1) From my understanding, DCC is composing of a time deposit and selling an OTM call option on deposit currency/ shorting an OTM put on the linked currency? I was told it's always shorting OTM options but not ITM, why so?

2) Can you distinguish the differences between the risk/return profile, benefits and disadvantages when buying FX spot, FX swap, simple FX options and DCC?

For example, If I am investor holding USD, and I view AUD will depreciate in 2-3 months time, I am a risk taker and want to speculate theFX market. Which FX investment tools should I go for? Buying Spot? Signing Swap, Simple FX options or DCC?

I am still abit confused around the concept of different FX investment tools.

Your help is much appreciated. Continue with your good blog, I would love to read updates from your blog from time to time.

Best,; July 01, 2010 4:15 PM
Shane Castane said...: Although it might not currently seem like an attractive venture, as people still live in the shadow of September 11, and are recovering from the wounds of a four year long war with Iraq, the future still looks bright for business. So, before you turn down the option of having to buy Iraqi Dinar and invest it in a local industry, you should do in-depth, unbiased research on the matter and decide from everything you have learned from the research.; December 28, 2012 6:45 PM
Peter said...: Hi Mr Tan,

Hope you do respond to questions in comments. What if you actually needs AUD would it still be worthwhile doing DCI? Maybe savings in bank charges for cable, currency conversion charges if any?; June 25, 2016 11:47 AM
Anonymous said...: Hi Mr Tan,

I just want to share with the readers that I have suffered 20+% loss of my family's wealth via DCI investment.

We just want to make good use of money by earning a conservative interest yield and the banker had effectively helped us made a loss! Our original fund is SGD later converted to AUD and then converted to USD. Double whammy with SGD and USD currency sliding down.

You will see that the banker will stick to the same pitch. Keep on investing USD. The currency will rise up sooner or later. The banker of mine even dared to say that the USD currency will go up to 1.45. This is a dangerous message.

Exactly your advice. The banker said we are not losing your base fund. Just keep it as AUD and USD until the currencies rise. This is all bullshit. Now, we are stuck with USD and earning no interest rate. This is a long term investment loss in value and in time.

Please don't invest in DCI unless you are economics/market savvy yourself and is able to take risk. Whatever the banker tells you about positive about DCI, please ask about the downsides (worse scenarios) and see if the banker can articulate your loss.

A poor consumer cheated by a bank; August 12, 2016 3:21 PM
Anonymous said...: My friend just bought premium currency link investment Friday. Can she cancel now.; July 16, 2017 6:40 PM
Anonymous said...: My friend bought premium currency link investment can she cancel now; July 16, 2017 6:42 PM