Tan Kin Lian's Blog: Leveraged Dual Currency Investments

Sunday, October 26, 2008

Leveraged Dual Currency Investments

I have been advising people to avoid Dual Currency Investment for the past year. My views are stated in this FAQ: http://www.tankinlian.com/faq/duali.html

This type of investment allows you to bet on currency movements. You stand the chance of a big loss when the currency moves against you. You only get a small return (in the form of a higher interest rate) when currency moves in your favour.

Recently, the AUD dropped by 30%. Those who were "long" in AUD lost 30%. But those who were "short" in AUD did not gain 30%. They only gain 1% or 2% in higher interest. The bank keeps the remainder of the profit.

I learned to my horror that unsophisticated investors were asked to invest in "leveraged" dual currency investments. The bank lends them 4 times of their investment, so that they can take 5 times of the risk. If the currency drops by 20%, their total investment is wiped out (i.e. 20% X 5 times).

The relationship manager of the bank who sold the leveraged DCI earned 5 times of the commission on this product. But, it wiped out the total savings of the investors.

Someone told me that her mother lost $500,000 on this type of investment. Another retiree told me that he lost $150,000 in 2 months, out of the invested sum of S200,000.

Do not invest in any of these products. Be careful about the advice of the relationship managers.

11 comments:

Falcon said...: I once bought into such a dual currency Investment earning an 18.2% interest with the Japanese Yen. What attracted me was the advertised 18.2% interest. However, on closer examination and analysis, the 18.2% is per year while the term for the investment is only 2 weeks. So it is actually 18.2% divided by the number of weeks in a year multiply by two which works out to be a 0.7% interest I am getting but in return expose myself to a possibility of wiping out my entire investment. Luckily I escaped unscathed but I will not want to try it again.; October 26, 2008 2:24 PM
Anonymous said...: This reminds me of a certain bank which i think downright cheats the public with a big poster saying 12.6% interest on deposits. On closer examination, this refers to the interest over a minimum 5 year deposit. So on per annum basis, the actual interest is just about the market rate. Again I think MAS is sleeping and not responsive to the market at all that is what makes the banks more and more and more daring. Mice are smart they check out the cat before doing bigger things.

REX; October 26, 2008 7:37 PM
Anonymous said...: My RM who sold me the minibond recommended this to me. I followed her advice like a silly goat and lost more than $20k in a span of 2 weeks.; October 26, 2008 9:11 PM
Anonymous said...: What mr tan said is correct. I played such dual currency game too for a short while and lost some money. It is usually betting one currency against another and you will win only for a very narrow band. If you lose, your currency will be converted to the weaker currency. After a few losses, your original capital can fall quite substantially because of convesion rates. Unless you are expert in fx, never never never try it!!!!!!
Again, the banks have all the expert to design such products to make money for the banks and their bonuses. Don't be fools again. I will never never trust the banks anymore for whatever products they try to sell. Banks are not charitable organizations, remember this. I would rather buy stocks or keep my money in clearly safe investments. Forget about all the Notes, structured deposits or any products with fancy names enginerred by the banks' genius who are out there to make you lose your money for the banks.; October 26, 2008 10:26 PM
Everlearning said...: Banks should not recommend this DCI to the customers who just want to put in foreign fixed deposited. I was recommended to this without knowing how it worked and got converted into a different foreign currency.

I feel sorry for those who are so trusting and allowed these RMs to manipulate to the extent of loosing their money.

Anyway, in future, I will not take up investments from any bank anymore because after seeing what happened to the investors who bought into H-notes, minibonds, J-notes... I got the message that banks are there to make money out of you.; October 26, 2008 11:00 PM
Anonymous said...: yes, you are right. banks are not charitable organisations. banks are out to make money just like how businesses are meant to be profitable. glad that some pple finally do 'get it'. how did they get the wrong idea in the first place?; October 27, 2008 12:26 AM
freeier said...: To be fair, this product is good if you know what you are investing.

i.e. everything has their use. structured deposit is useful if you know what views you are taking ... DCI is good if you want yield on a ranging market.

but bottomline is, its too complex for the retail investors and especially retirees...; October 27, 2008 1:58 AM
Game1980 said...: Never ask a barber whether u need a haircut?; October 27, 2008 2:10 PM
Anonymous said...: Now that the government had required all travel agency to display the EXACT price of ticket, should the MAS do the same to these FIs? No more 12.6% over 5 years, no more 8.88% for first 1 month etc this kind of misleading words.; October 29, 2008 11:31 AM
Anonymous said...: I too was almost fooled by a big and reputable foreign bank here. It keep rotating its relationship managers (about 10-20 at least) to try and sell me all kind of products (structure deposits, dual currency, insurance, foreign exchange, etc). One RM even send me a big and fabulous birthday cake. Fortunately, I was not swayed by them. Mr Tan Kin Lian is right to advise all investors not to buy any products if they do not fully understand them.; October 29, 2008 3:24 PM
Anonymous said...: That's why I never have or invest in these instruments...

- Credit Cards
- Insurance-Linked Investment
- Any Bank Recommend Investment
- etc

The reason are simple - just look at the bank and financial people. Those who reached there are overpaid, those haven't are money-hungry. Look at what they drive, look at their watches, look at what they eat... Gosh. These people want to live high, by selling you things which makes them richer. Gosh.

I hear that for insurance, some of the policies allow the agent to earn the first year of premium as commission. I remembered a friend who tried to sell me a technology-linked unit trust during the dot-com bust period, telling me that based on the fact that the trust is at it's lowest, is the best time to buy. Huh? Gosh.

I'm an entrepreneur and I like starting companies and making $$$ with my own hands. Two of my businesses, which I pumped around $20k each, are generating a total of $1.2 million of revenue each year, all within a span of 5 years. I canceled my insurances, denied banks to issue me credit card (just depending on my good old ATM card), and trying to rebuild my finance based on hardwork and savings.; November 01, 2008 5:02 AM