Hi Kinlian
I have come across some of your articles online regarding DCIs and I just have a few questions regarding the mechanics of how it works.
Suppose I have $100,000 SGD (base currency) and the DCI is for USD. The DCI offers a higher interest rate of 3% becasue they are compensating me for the naked put on USD i just sold to them. I was just curious about how the volatility of the USD exchange rate affect how attractive this investment is compared to a FD of let's say 1.5% SGD?
I get that with higher volatility, a DCI is less attractive since upsides are capped. However, I can't seem to reconcile this with the formulae I learnt in my derivatives module. I know volatility affects the price of an option but I don't understand how a higher or a lower price for the option affects my potential returns on the DCI.
Would love to hear your opinion on this issue.
Reply
I have no idea how the complicated formula works. I do not trust any complicated scheme.
I know that the real expert, who are paid a lot of money for the financial institution, have to earn their high income by giving more profit to their employers.
That profit must come from ordinary investors who try to take bets against the financial institution on the products created by these institutions.
I have come across some of your articles online regarding DCIs and I just have a few questions regarding the mechanics of how it works.
Suppose I have $100,000 SGD (base currency) and the DCI is for USD. The DCI offers a higher interest rate of 3% becasue they are compensating me for the naked put on USD i just sold to them. I was just curious about how the volatility of the USD exchange rate affect how attractive this investment is compared to a FD of let's say 1.5% SGD?
I get that with higher volatility, a DCI is less attractive since upsides are capped. However, I can't seem to reconcile this with the formulae I learnt in my derivatives module. I know volatility affects the price of an option but I don't understand how a higher or a lower price for the option affects my potential returns on the DCI.
Would love to hear your opinion on this issue.
Reply
I have no idea how the complicated formula works. I do not trust any complicated scheme.
I know that the real expert, who are paid a lot of money for the financial institution, have to earn their high income by giving more profit to their employers.
That profit must come from ordinary investors who try to take bets against the financial institution on the products created by these institutions.
Hi,
ReplyDeletethe question you should ask if you do need the USD when you are converted at the strike price. To put it simply the higher the volaitilty the higher the yield pick up intially. However, you can lose big if the conversion at strike price travels beyond your breakeven at maturity. However, if you happy keeping USD (in this SGD/USD DCI) upon conversion from SGD. eg you have children you need to send to USA for university studies or studying there now.... If there is no conversion you enjoy the extra yield pick up in SGD. My 2 cents....