I wanted to place a fixed deposit in New Zealand Dollars to enjoy a higher interest rate.
The relationship manager of the bank tried to get me to invest in a Dual Currency Deposit. She wanted to get the currency specialist to see me and explain the product.
There was no need for a visit. I was able to find the description of the product from the website. Here are the key facts.
Basically, it offers a slightly higher interest rate, but on maturity I get the weaker of the two currencies.
By earning a slightly higher interest rate, I forego any appreciation in the New Zealand dollar. On the other hand, if this currency drops, I have to bear the entire loss.
I decided against the Dual Currency deposit. I prefer to have a lower interest rate and enjoy the full impact of any appreciation in the currency (while taking the loss on a depreciation).
Here is the explanatory note:
Dual Currency Plus is not a deposit but an investment product. With Dual Currency Plus, the principal sum and returns are repayable either in the currency in which the investment is made (“base currency”) or an alternative currency (“linked currency”) at maturity. Early withdrawal of Dual Currency Plus is not permitted. Dual Currency Plus is inherently speculative in nature and carries risks. In particular, foreign currency market movements are unpredictable.
If the proceeds at maturity are paid in the linked currency (as opposed to the base currency), there is a possibility that you will suffer a loss on your principal sum when compared with the amount of the base currency initially invested.
As your investment is denominated in a foreign currency, you are advised to consider the impact of any foreign exchange risk on the net returns of your investment. Foreign exchange controls may be imposed by the country issuing the foreign currency from time to time and may delay or prevent the repayment of principal amount to you.
Showing posts sorted by relevance for query dual currency. Sort by date Show all posts
Showing posts sorted by relevance for query dual currency. Sort by date Show all posts
Wednesday, November 14, 2007
Monday, November 19, 2007
Dual Currency investment
Dear Mr. Tan,
My bank offered me a high rate of interest on a dual currency deposit. Is it safe to invest in this type of deposit?
REPLY
A Dual Currency Investment is not a deposit. It is an investment product. You are given a higher interest rate, but you face the risk of suffering the loss on the original investment, if the currency rate goes against you.
The principal sum and interest are repayable on maturity in the base currency (i.e in which the investment is made) or the linked currency, whichever is the lower.
If the linked currency goes up, you will only get the fixed return. If it goes down, you will have to suffer a loss. Your loss can be quite substantial.
Usually, the bank does not offer an interest rate that is sufficient to compensate you for the risk.
If you are willing to take the currency risk, it is better to invest in the foreign currency directly. If the currency appreciates, you will get the gain from the currency and the interest rate (which is likely to be higher than in Singapore dollars). The total gain is likely to be better than the interest rate paid on the Dual Currency Investment.
Read this FAQ:
http://www.tankinlian.com/faq/duali.html
My bank offered me a high rate of interest on a dual currency deposit. Is it safe to invest in this type of deposit?
REPLY
A Dual Currency Investment is not a deposit. It is an investment product. You are given a higher interest rate, but you face the risk of suffering the loss on the original investment, if the currency rate goes against you.
The principal sum and interest are repayable on maturity in the base currency (i.e in which the investment is made) or the linked currency, whichever is the lower.
If the linked currency goes up, you will only get the fixed return. If it goes down, you will have to suffer a loss. Your loss can be quite substantial.
Usually, the bank does not offer an interest rate that is sufficient to compensate you for the risk.
If you are willing to take the currency risk, it is better to invest in the foreign currency directly. If the currency appreciates, you will get the gain from the currency and the interest rate (which is likely to be higher than in Singapore dollars). The total gain is likely to be better than the interest rate paid on the Dual Currency Investment.
Read this FAQ:
http://www.tankinlian.com/faq/duali.html
Thursday, November 15, 2007
Dual Currency Investment
VIEW POSTED IN MY BLOG
I have been doing dual currency investments for 2-3 years as I have a need for a particular foreign currency.
DCI 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.
REPLY
If you have made a profit from your investment in Dual Currency products over three years, I am surprised. Perhaps you can send an e-mail to me? I like to discuss your actual experience.
I have been doing dual currency investments for 2-3 years as I have a need for a particular foreign currency.
DCI 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.
REPLY
If you have made a profit from your investment in Dual Currency products over three years, I am surprised. Perhaps you can send an e-mail to me? I like to discuss your actual experience.
Monday, July 19, 2010
Dual Currency Investment - Small Gain and Big Loss
Someone sent me an e-mail sharing his positive experience in dual currency investments. He found that it gave him a better yield than fixed deposit.
This is true. Many investors had similar positive experience. But, when it comes to a loss, they can lose big. And the odds are against the investor.
Take this hypothetical example. In stable times, you are likely to make a small gain, say 0.1% in 1 week. This amounts to 5.2% in 1 year, which is more attractive in fixed deposit. However, when the market gets volatile, you can lose 10% within a week, before you close the deal. At that time, you take over the foreign currency and wait for its recovery. But, it can get worse.
If you gain 0.1% on a bet and lose 10%, you need to have 100 winning bets to cover 1 big loss. You are likely to find the losing event occur earlier than 100 weeks. But that time, you would have learnt your lesson, and would not come back.
The dual currency investment is bad for the small investor, due to the high charges and marketing expenses. This is similar to any structured product. If you wish to speculate on foreign currency, it is better to buy the foreign currency directly and take your chance. At least, you have a more even chance of winning and losing.
Read the FAQ in www.tankinlian.com (Ask Mr. Tan). My book, Practical Guide on Financial Planning, has a few examples of investors who lost big sums on money on dual currency investments. www.easysearch.sg/ishop.
This is true. Many investors had similar positive experience. But, when it comes to a loss, they can lose big. And the odds are against the investor.
Take this hypothetical example. In stable times, you are likely to make a small gain, say 0.1% in 1 week. This amounts to 5.2% in 1 year, which is more attractive in fixed deposit. However, when the market gets volatile, you can lose 10% within a week, before you close the deal. At that time, you take over the foreign currency and wait for its recovery. But, it can get worse.
If you gain 0.1% on a bet and lose 10%, you need to have 100 winning bets to cover 1 big loss. You are likely to find the losing event occur earlier than 100 weeks. But that time, you would have learnt your lesson, and would not come back.
The dual currency investment is bad for the small investor, due to the high charges and marketing expenses. This is similar to any structured product. If you wish to speculate on foreign currency, it is better to buy the foreign currency directly and take your chance. At least, you have a more even chance of winning and losing.
Read the FAQ in www.tankinlian.com (Ask Mr. Tan). My book, Practical Guide on Financial Planning, has a few examples of investors who lost big sums on money on dual currency investments. www.easysearch.sg/ishop.
Friday, June 05, 2009
It is easy to be cheated (6) - Currency linked notes
This is similar to the equity linked notes. They are usually marketed as Dual Currency Investments or Dual Currency Deposits.
They are created by financial institutions and usually take the following form - the capital is invested in a certain foreign currency. If the currency rate stay above a certain price X during the specified , the investor gets a specified interest rate, which is higher than fixed deposit rate.
If the currency rate fall below a certain price Y, the investors have to take delivery of the specified currency. The investors are told that they can keep the currency until it recovers in value. The investor think that it is all right to keep the currency.
This is how the investor can be cheated. If the specified currency goes up 10% during the holding period, the investor gets a certain interst rate, which is lower than the actual gain. The product issurer keeps the balance of the gain. If the currency drops by 10%, the investor has to bear the full paper loss.
There is no way for the retail investor to know if the terms of the transactions are fair. As the terms are determined by the product issuer, it is likely that the terms are created to make a profit for the issuer, at the expense of the investor.
Many people have lost a large proportion of their capital when the currency market goes against them. If the market goes in their favour, the received a higher interest rate, but they were not aware that this is much lower than the actual gain.
To make the matter worse, some financial institutions lend money to take five times of the risk of the invested capital. The retail investors were not aware that their risk has increased five times due to the leverage. If the currency drops 20%, they could lose their entire capital. They do not get a commensurate return if the share price moves in their favour!
Is this fair? Can it be considered as cheating?
Tan Kin Lian
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.
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.
Sunday, February 15, 2009
Avoid dual currency products
Dear Tan
I am from Malaysia. I wish to invest in dual currency investment . Can you advise in this market situation , which foreign currency can invest ? Aussie dollar? any risks ? I am new in this investment. Will I lose all my money or i will make profit from it.
I am from Malaysia. I wish to invest in dual currency investment . Can you advise in this market situation , which foreign currency can invest ? Aussie dollar? any risks ? I am new in this investment. Will I lose all my money or i will make profit from it.
REPLY
My advice is to avoid all dual currency products. Read my views .
You can also search my blog for postings under the title "dual currency".
Wednesday, June 02, 2010
Dual currency investments
A reader asked why dual currency investments are risky. I have described this type of risky investments in several postings in my blog. You can read them here:
http://tankinlian.blogspot.com/search?q=dual+currency+
There is a chapter in my book, Practical Guide on Financial Planning, that explains the the risk of various tyoes of structured products, including dual currency investments, and of unregulated products, such as land banking, ponzi schemes and other scams.
http://tankinlian.blogspot.com/search?q=dual+currency+
There is a chapter in my book, Practical Guide on Financial Planning, that explains the the risk of various tyoes of structured products, including dual currency investments, and of unregulated products, such as land banking, ponzi schemes and other scams.
Saturday, December 01, 2007
Misled into a Dual Currency Investment
Dear Mr. Tan,
When my foreign currency matured recently, the bank consultant got me into dual currency investment. He sounded very logic that US dollars will further depreciate and that he believed that the Australian dollars will appreciate. This is a month tenor. He did not work out the exact loss I would face if the situation is not favourable to me.
After I read your article in you website, I felt terrible. What if I lost when it matures on 14th December. This is my savings for the past 18 years. I had put it in fixed deposits all these years and never thought I could be persuaded into this foolish act of mine.
What is your advice to me if I got the other currency and not the base currency. Should I just put the Australian dollors into a fixed deposit? I want to thank you for enlightening me in many of your articles.
REPLY:
If you do not wish to take any risk, you should keep the money in Singapore dollar fixed deposit and earn 2% interest. You can also invest in a money market fund or in Government bonds.
If you invest in foreign currency, you can take the risk and hope for the best. You will earn a higher interest rate, but this could be offset by the possible depreciation in the foreign currency.
The foreign curreny may appreciate and give you a double benefit. Read this FAQ: http://www.tankinlian.com/faq/foreign.html
I am not able to give specific advice on which currency to invest in.
When my foreign currency matured recently, the bank consultant got me into dual currency investment. He sounded very logic that US dollars will further depreciate and that he believed that the Australian dollars will appreciate. This is a month tenor. He did not work out the exact loss I would face if the situation is not favourable to me.
After I read your article in you website, I felt terrible. What if I lost when it matures on 14th December. This is my savings for the past 18 years. I had put it in fixed deposits all these years and never thought I could be persuaded into this foolish act of mine.
What is your advice to me if I got the other currency and not the base currency. Should I just put the Australian dollors into a fixed deposit? I want to thank you for enlightening me in many of your articles.
REPLY:
If you do not wish to take any risk, you should keep the money in Singapore dollar fixed deposit and earn 2% interest. You can also invest in a money market fund or in Government bonds.
If you invest in foreign currency, you can take the risk and hope for the best. You will earn a higher interest rate, but this could be offset by the possible depreciation in the foreign currency.
The foreign curreny may appreciate and give you a double benefit. Read this FAQ: http://www.tankinlian.com/faq/foreign.html
I am not able to give specific advice on which currency to invest in.
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.
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.
Wednesday, April 23, 2008
Dual Currency Investment
Dear Mr. Tan,
Dual currency premium deposit, if US$ is the base currrency and the dual currency deposit is Aud at intrerest of say 8.% with tenor to 1 month. How does it work and how should I set my strike price so that I do not lose my base currency principal
REPLY
Read this FAQ
http://www.tankinlian.com/faq/duali.html
Dual currency premium deposit, if US$ is the base currrency and the dual currency deposit is Aud at intrerest of say 8.% with tenor to 1 month. How does it work and how should I set my strike price so that I do not lose my base currency principal
REPLY
Read this FAQ
http://www.tankinlian.com/faq/duali.html
Wednesday, July 30, 2008
Avoid Dual Currency Investments
Hi Mr. Tan,
I refer to your FAQ on dual currency investment. I'm also being asked by my bank to invest in such type of investment - SGD/AUD.
I'm really waiting for the AUD to drop (or SGD to improve), to transfer my funds from SGD to AUD and send it to Australia. The bank said, since you're waiting, why not invest in this product.
My question after reading your example is, when would I stand to lose (you mentioned if the currency is converted to the linked currency). I don't quite understand when I would make a loss (my risk).
I understand that I can earn the interest if the SGD rate drops; I understand that I can earn if the AUD rate improves and my currency is converted at the agreed target rate. Either way, it's just whether I earn more or earn less, but I'm still earning, right?
Please give an example if it helps better explain how I will lose on my initial investment?
REPLY
I advise people to avoid the linked currency products. My reasons are set out here: http://www.tankinlian.com/faq/duali.html
I refer to your FAQ on dual currency investment. I'm also being asked by my bank to invest in such type of investment - SGD/AUD.
I'm really waiting for the AUD to drop (or SGD to improve), to transfer my funds from SGD to AUD and send it to Australia. The bank said, since you're waiting, why not invest in this product.
My question after reading your example is, when would I stand to lose (you mentioned if the currency is converted to the linked currency). I don't quite understand when I would make a loss (my risk).
I understand that I can earn the interest if the SGD rate drops; I understand that I can earn if the AUD rate improves and my currency is converted at the agreed target rate. Either way, it's just whether I earn more or earn less, but I'm still earning, right?
Please give an example if it helps better explain how I will lose on my initial investment?
REPLY
I advise people to avoid the linked currency products. My reasons are set out here: http://www.tankinlian.com/faq/duali.html
Tuesday, February 05, 2008
Dual currency investment (or deposit)
Dear Mr. Tan,
Recently, I wanted to invest in Australian deposit (to enjoy a higher interest rate). The relationship manager recommended a Dual Currency deposit to me. It gives me a higher interest rate, but on maturity I am given my money back in Singapore dollars or Australian dollars, depending on the exchange rate at that time. Is this a good investment?
REPLY
I advise against this type of structured product. Although you get a slightly higher interest rate, you are exposed to the risk of a loss (in case the Australian currency depreciates). You do not get the benefit of any gain in this currency.
This is explained in more detail in this FAQ:
http://www.tankinlian.com/faq/duali.html
It is better to invest in a straight forward foreign currency deposit:
http://www.tankinlian.com/faq/foreign.html
Recently, I wanted to invest in Australian deposit (to enjoy a higher interest rate). The relationship manager recommended a Dual Currency deposit to me. It gives me a higher interest rate, but on maturity I am given my money back in Singapore dollars or Australian dollars, depending on the exchange rate at that time. Is this a good investment?
REPLY
I advise against this type of structured product. Although you get a slightly higher interest rate, you are exposed to the risk of a loss (in case the Australian currency depreciates). You do not get the benefit of any gain in this currency.
This is explained in more detail in this FAQ:
http://www.tankinlian.com/faq/duali.html
It is better to invest in a straight forward foreign currency deposit:
http://www.tankinlian.com/faq/foreign.html
Saturday, August 13, 2016
Investor lost 20% of family wealth on Dual Currency Investment
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 on Dual Currency Investment
Friday, August 27, 2010
Short term investment
Hi Mr Tan,
What is the best (low risk) investment instrument to use if I have 100k and I need the money in 6 months time? I do not want to leave it in my savings account as the interest rate is very low. I was introduce into dual currency investment by my bank. What's your take on it?
REPLY
For short term invstment, you have to accept the low interest rate offered by the banks. You can place it on fixed deposit to earn more than saving account. In my case, my short term cash is kept in an auto-save account which earns a low interest rate.
You should avoid all types of dual currency investments. Read the FAQ in my website, www.tankinlian.com. Look for "Ask Mr. Tan" and search for "Dual Currency".
http://tankinlian.com/Admin/File.aspx?id=66
What is the best (low risk) investment instrument to use if I have 100k and I need the money in 6 months time? I do not want to leave it in my savings account as the interest rate is very low. I was introduce into dual currency investment by my bank. What's your take on it?
REPLY
For short term invstment, you have to accept the low interest rate offered by the banks. You can place it on fixed deposit to earn more than saving account. In my case, my short term cash is kept in an auto-save account which earns a low interest rate.
You should avoid all types of dual currency investments. Read the FAQ in my website, www.tankinlian.com. Look for "Ask Mr. Tan" and search for "Dual Currency".
http://tankinlian.com/Admin/File.aspx?id=66
Wednesday, October 29, 2008
Regulator should disallow the sale of bad products
The CEO of a large government owned organisation told me,
"Kin Lian, you are opening a pandora's box. By speaking for the investors who were misled into buying the structured products, you allow other sophisticated investors to claim that they were also misled and to claim compensation. How can you differentiate between the two group?"
I showed this blog to him on my notebook computer: http://tankinlian.blogspot.com/2008/10/nature-and-risk-of-structured-product.html
After reading it, he changed his mind. He did not realise that the product could be so toxic and was surprised that it was allowed to be sold. Nobody would have bought the product, if it was properly described to them.
I showed to him another potential time bomb, concerning the leveraged dual currency investment:
http://tankinlian.blogspot.com/2008/10/leveraged-dual-currency-investments.html
He was again surprised. He wanted to check if his wife also invested in these dual currency investment. It is so easy for the unsavvy to be fooled.
He suggested to me on how the message of these bad products could be disseminated more widely to inform the investors. I replied that, by naming the products, I stand the risk of being sued by the creators of these products. In my view, it is the job of the regulator to ensure that bad products cannot be sold.
"Kin Lian, you are opening a pandora's box. By speaking for the investors who were misled into buying the structured products, you allow other sophisticated investors to claim that they were also misled and to claim compensation. How can you differentiate between the two group?"
I showed this blog to him on my notebook computer: http://tankinlian.blogspot.com/2008/10/nature-and-risk-of-structured-product.html
After reading it, he changed his mind. He did not realise that the product could be so toxic and was surprised that it was allowed to be sold. Nobody would have bought the product, if it was properly described to them.
I showed to him another potential time bomb, concerning the leveraged dual currency investment:
http://tankinlian.blogspot.com/2008/10/leveraged-dual-currency-investments.html
He was again surprised. He wanted to check if his wife also invested in these dual currency investment. It is so easy for the unsavvy to be fooled.
He suggested to me on how the message of these bad products could be disseminated more widely to inform the investors. I replied that, by naming the products, I stand the risk of being sued by the creators of these products. In my view, it is the job of the regulator to ensure that bad products cannot be sold.
Thursday, November 15, 2007
Limited upside gain for a Dual Currency deposit
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?
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?
Sunday, October 12, 2008
Big loss on dual currency investment
Dear Mr Tan,
My mother told me that she invested in a dual currency investment ( USD, New zealand dollar, yen) for about USD $500K from her retirement saving, and suddenly the bank told her that she lost all her money, and if she want to stay and get her money back she need to inject another $500k.
So what should we do, I'm not familiar with dual currency investment, and neither does she. Does it means that she lost all her retirement money? Is it true if we inject the money $500k will cover the lost for the other 500k?
I really appreciate your advice.
REPLY
Please ask your mother to get a detailed statement and explanation from the bank. You can send it to me.
You can register the particulars of your mother in this Petition:
http://www.PetitionOnline.com/PCFXT1/petition.html
My mother told me that she invested in a dual currency investment ( USD, New zealand dollar, yen) for about USD $500K from her retirement saving, and suddenly the bank told her that she lost all her money, and if she want to stay and get her money back she need to inject another $500k.
So what should we do, I'm not familiar with dual currency investment, and neither does she. Does it means that she lost all her retirement money? Is it true if we inject the money $500k will cover the lost for the other 500k?
I really appreciate your advice.
REPLY
Please ask your mother to get a detailed statement and explanation from the bank. You can send it to me.
You can register the particulars of your mother in this Petition:
http://www.PetitionOnline.com/PCFXT1/petition.html
Friday, February 15, 2019
How did this retiree lose 95.5% of her investment?
A retiree invested $250,000 with a bank. She lost 95.5% of the investment. The value of her investment is now $11,200. What type of investment is this?
PERPETUAL SECURITIES?
Some people speculated that she bought the Hyflux Perpetual Securities. However, these securities are now not traded. It does not lose 95.5% of the value. There is no market now, as the shares and bonds are suspended. The indicative value of the bonds show a drop of 52%.
DUAL CURRENCY INVESTMENTS?
She could have invested the $250,000 in dual currency investments. If she did, how could she have lost 95.5%? Even if the reference currency had dropped 20%, she would have lost only 20%. She also had the choice of holding the reference currency and hope that it would rebound some time in the future.
What actually happened?
https://fisca.sg/ArticleDisplay.aspx?ID=629
PERPETUAL SECURITIES?
Some people speculated that she bought the Hyflux Perpetual Securities. However, these securities are now not traded. It does not lose 95.5% of the value. There is no market now, as the shares and bonds are suspended. The indicative value of the bonds show a drop of 52%.
DUAL CURRENCY INVESTMENTS?
She could have invested the $250,000 in dual currency investments. If she did, how could she have lost 95.5%? Even if the reference currency had dropped 20%, she would have lost only 20%. She also had the choice of holding the reference currency and hope that it would rebound some time in the future.
What actually happened?
https://fisca.sg/ArticleDisplay.aspx?ID=629
Wednesday, September 09, 2009
Gambling on foreign currency
If you buy foreign currency, you are gambling on its exchange rate in the future. If it goes up, you make a profit. If it goes down, you make a loss.
If you lose on your position, you can decide to hold to that position, and hope that it will recover. It may recover or it may get worse (and increase your loss). This is gambling, so it is better to recognise its nature and think like a gambler.
It is all right to gamble, provided that you get the full benefit of any upside, and take the full loss of any downside. Make sure that your cost of the transaction is small, i.e. less than 0.3% for each side of the trade. The cost is the spread between the buying and selling price at the same time, and the additional charges that you have to pay to the bank.
There is another type of gambling that you should avoid. Do not gamble when the odds are loaded against you. If you gamble on a card game, do not gambling against a shark who has marked cards. He has superior information and is likely to win against you.
Similarly, you should not gamble on dual currency trade when the terms of the transaction are set by the bank who is taking the other side of the trade. You can be sure that the terms will be loaded in favour of the bank, who makes a profit when you make a loss.
One year ago, the Australian dollar dropped 30% against the US dollar over two weeks. The investors who were "long" on Australian dollars suffered a 30% loss. Those who were "short" on Australian dollars did not benefit from a 30% gain. They only get 2% or 4%. The rest of the gain goes to the bank who wrote the terms of the dual currency trade.
Are there circumstances where the bank will lose? Maybe, but the risk is small for the bank. They employ financial engineers to set the terms of the trade. These financial engineers look after the interest and profit of the banks. Guess who loses?
In some countries, the regulators ban this type of product as it is unfair to retail investors. But there is no such scrutiny in Singapore, so retail investors can be given unfair terms of the trade, i.e. "taken for a ride".
Lesson: never gamble on exotic products where the terms are written by the other party of the trade.
Tan Kin Lian
If you lose on your position, you can decide to hold to that position, and hope that it will recover. It may recover or it may get worse (and increase your loss). This is gambling, so it is better to recognise its nature and think like a gambler.
It is all right to gamble, provided that you get the full benefit of any upside, and take the full loss of any downside. Make sure that your cost of the transaction is small, i.e. less than 0.3% for each side of the trade. The cost is the spread between the buying and selling price at the same time, and the additional charges that you have to pay to the bank.
There is another type of gambling that you should avoid. Do not gamble when the odds are loaded against you. If you gamble on a card game, do not gambling against a shark who has marked cards. He has superior information and is likely to win against you.
Similarly, you should not gamble on dual currency trade when the terms of the transaction are set by the bank who is taking the other side of the trade. You can be sure that the terms will be loaded in favour of the bank, who makes a profit when you make a loss.
One year ago, the Australian dollar dropped 30% against the US dollar over two weeks. The investors who were "long" on Australian dollars suffered a 30% loss. Those who were "short" on Australian dollars did not benefit from a 30% gain. They only get 2% or 4%. The rest of the gain goes to the bank who wrote the terms of the dual currency trade.
Are there circumstances where the bank will lose? Maybe, but the risk is small for the bank. They employ financial engineers to set the terms of the trade. These financial engineers look after the interest and profit of the banks. Guess who loses?
In some countries, the regulators ban this type of product as it is unfair to retail investors. But there is no such scrutiny in Singapore, so retail investors can be given unfair terms of the trade, i.e. "taken for a ride".
Lesson: never gamble on exotic products where the terms are written by the other party of the trade.
Tan Kin Lian
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