Monday, September 08, 2008

Big exchange loss in a Dual Currency Investment

Hi Mr. Tan,
I invested in a Dual Currency Investment two years ago and made a good return. Recently, the AUD depreciated against the USD. All of my investments got converted to AUD at 0.90. The exchange rate has now dropped further to 0.816, which makes the unrealized forex loss to US$50K.

What strategy should I take to minimized the loss? Right now, while waiting for the AUD to do better against USD, I have placed my money into a weekly time deposit earning almost 6%p.a.

REPLY
It is all right to keep the AUD in fixed deposit and earn 6% interest. There is a chance that it will recover, as it has dropped by more than 10%.

If you had invested in the AUD directly, instead of a DCI investment during the past two years, you would have made an exchange gain that is more than the loss that you suffer now. But, if you invested in the DCI, your gain would have been much lower.

I usually advise people to avoid DCI, as the investor is taking the risk of a loss (like you did), it was not able to enjoy the full appreciation (if the currency goes up).

Read this FAQ:
http://www.tankinlian.com/faq/duali.html
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4 comments:

Unknown said...

Every instrument has its purpose so just advising ppl to avoid certain instrument without finding out investor background is totally inappropriate in my opinion.

DCI is a good YIELD enhancing product if one is indifferent to either currencies. That being said, one must always know the exchange risk involves to determine when is a good time to 'invest' in DCI.
Same as stock, does one buy a stock all the way regardless of its price? Certainly not in valuation perspective.

September 08, 2008 5:56 PM
David said...

Also depends whether FED will start raising interest rates again from the current low of 2%. That will affect the US$ vs other currencies rate and interest rate.
For instance, the banks now are offering promotional S$ FD rates to lock clients into 18 month or 1 year tenure. This is a sign that interest rates may rise in the near future from current low. This pattern has happened before in 2005 and 2006 when interest rates went from low to high.

September 08, 2008 10:36 PM
ym said...

david, no way the FED rates are going to increase..

we are facing a severe global recession.. in fact i think FED rates will come down..

rates come does not mean usd will depreciate.. it does not happen that way.. less to do with interest rates more with the money supply..

September 09, 2008 10:54 AM
David said...

To ym,

Will know next week 16 Sep 08 (FED meeting)whether FED will raise rates.

There is a positive correlation between FED rate increase and local SIBOR rates. I have observed this for years, although other things I may not be so sure so I won't debate on it.

September 09, 2008 9:42 PM

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