FAQ: Dual Currency Investment

1. What is a Dual Currency Investment

A Dual Currency Investment is not a deposit. It is an investment product. There is the chance of making a higher return, compared to a deposit, and suffering a loss on the original investment.

The principal sum and returns are repayable on maturity in the base currency (i.e in which the investment is made) or the linked currency, whichever is the lower.

Early withdrawal of the investment is not permitted. The investment 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, the investor may suffer a loss on the principal sum.

As the investment is denominated in a foreign currency, the investor has to consider the impact of any foreign exchange risk on the net return of the 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.

2. Is this a good investment?

It depends on the rate of return and the risk that you have to take. Here is an actual real life example:

Option 1: Invest in New Zealand Dollar for 1 month and earn 7.7% per annum. If the currency appreciates, the investor keeps the appreciation. If it falls, the investor suffers the loss.

Option 2: Invest in a Dual Currency investment in New Zealand Dollar and earn 8.0% per annum for one month. If the currency appreciates, the bank keeps the appreciation. If it falls, the investor suffers the loss.

Compared to a fixed deposit, the Dual Currency investment gives a higher return of 0.025% for 1 month, i.e. 1/12th of 0.3% (difference between 7.7% and 8.0%).

As the investor is taken the risk of a loss, in the event of a fall in the New Zealand currency, it is better to take the gain arising from an appreciation of the currency. There is no point in giving up this potential gain for a small additional gain of 0.025%.

3. Why do the banks actively market the Dual Currency Investment?

If you place a fixed deposit in foreign currency with the bank, you can shop around to get the best interest rate offered by various banks. Due to the competition, the bank has to offer an attractive interest rate and can earn a small profit margin on the deposit.
By selling the Dual Currency Investment, the bank is able to earn a higher profit margin, as the investor is not able to calculate the additional return that is necessary to compensate for the risk of a fall in the linked currency.

4. Actual experience: Investing in Dual Currency linked to Japanese Yen

An investor wanted to invest in Japanese Yen, as he felt that it was appreciating. He was persuaded by the bank to buy a Dual Currency Investment linked to the Japanese Yen and was given a return of 18.2% per annum.

The investment matured two weeks later. He got back the investment in Singapore dollars and made a gain of only 0.7% (i.e. 18.2% * 2 / 52 weeks).

If he had invested in Japanese Yen directly, he would have made a much higher gain (perhaps 2% to 5%) during the period, as the currency had appreciated strongly. If the Japanese Yen had fallen, he would have suffered the full loss.

His conclusion: By investing in the Dual Currency investment, he had to face unlimited downside risk and was deprived of the upside gain, in return for a small return. He would not invest in this type of investment in the future.

5. Actual experience: Investing in a Dual Currency linked to Australian Dollars

The investor invested in a Dual Currency investment linked to Australian dollars over a period of 3 years. He made several rounds of investments using 1 month tenure. He bought the investment when the Australian Dollar is low, and stayed away when it was high.

If the investment matured when the Australian dollar was low, he kept the currency and waited for it to appreciate. Due to his active management, he was able to make a return of 5.13% p.a. from the initial principal.

His conclusion: The Dual Currency Investment allowed him to earn a higher interest rate while waiting to get converted to a foreign currency at a more favourable exchange rate.

Note: If he had invested in a fixed deposit in Australian dollar during the same period, he would have made a higher return.