Wednesday, November 14, 2007

Investing in New Zealand Dollars

Which is better?

Option 1: Invest in NZD for 1 month and earn 7.7% per annum. If NZD appreciate, you earn the appreciation. If it falls, you suffer the loss.

Option 2: Invest in a Dual Currency deposit and earn 8.0% per annum. If NZD appreciate, the bank keeps the appreciation. If it falls, you suffer the loss.

I decided on option 1. Here is my calculation.

I assume:

1) Chance of appreciation: 30%, average gain 1%. Expected gain 0.3%
2) Chance of depreciation: 70%, average loss 1%. Expected loss 0.7%
3) The difference of 0.4% for 1 month is 4.8% for 1 year, which is the difference in interest rate between NZD and SGD

If NZD depreciates, I suffer a loss in both cases.

If NZD appreciates,
- under option 1, I get an additional 0.3% for 1 month
- under option 2, I get an additional 0.025% for 1 month (i.e 1/12th of 0.3%)

Why does option 2 give such a poor return for the risk (i.e 0.25% instead of 0.3%)? I suspect that the bank keeps the difference.
Posted by at

1 comment:

Anonymous said...

What if the interest given is much higher? I once was also persuaded, about three months ago, to do the dual currency thing. 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 do not go for dual currency anymore.

November 15, 2007 3:23 AM

Post a Comment

Subscribe to: Post Comments (Atom)

Blog Archive