Dual Currency Deposit
What Is a Dual Currency Deposit?
A dual currency deposit (or DCD) is a financial instrument structured to assist a depositor with exploiting relative differences in two currencies. It permits a bank customer to put aside an installment in one currency and pull out the money in an alternate currency in the event that it is advantageous to do as such. These products are otherwise called dual currency products or dual currency services.
The DCD joins a cash or money market deposit with a foreign exchange option. In view of the currency risk, dual currency deposits offer higher interest rates.
How a Dual Currency Deposit Works
Regardless of its name, a dual currency deposit isn't a deposit as in capital is at risk. A dual currency deposit is a structured product made out of a fixed deposit and an option. So the dual currency deposit is a derivative with a combination of a money deposit and a currency option. The investor will involve this product in order to catch higher yields from better interest paid by one currency compared to the next, and by relative changes in currency. In any case, it is likewise a fact that the investor must be ready to acknowledge higher risks that those equivalent changes in currency work negatively.
After currency repatriation, the moment the deposit is removed back it is workable for the investor to get back not exactly the initial investment, even after interest is calculated in. Thusly, it is better to think of it as an investment product with all associated risks.
Dual currency deposits are regularly short-term products for investors craving exposure to two currencies. The principal is definitely not a protected investment product. The two players must consent to terms including investment amounts, currencies included, maturity, and strike price. Interest is earned in the beginning currency, yet the principal has the possibility of a payment in the subsequent currency, ought to the counterparty exercise the option. Generally, this is a deposit that makes a foreign exchange rate risk for the investor, similar to that of a currency swap.
Illustration of a Dual Currency Deposit
The selling point for dual currency deposits is the chance to earn fundamentally higher interest rates. The risk for the investor is that the investment might be switched over completely to an alternate currency if the counterparty decides to exercise their option. On the off chance that that currency is one the investor wouldn't fret holding, then it's anything but a substantial risk to take.
Nonetheless, the risk is that the investment might in any case should be switched back over completely to the home currency sometime not too far off with a less positive exchange rate. The investor can decide to hold these funds in the foreign currency with the expectation that the exchange rate will eventually move in support of themselves, or exchange them right away, maybe at a loss, to free up the funds for future trades.
On the off chance that an investor lives in country B yet realizes that short-term interest is better in country A, they will like to invest their money in country A where they might understand better earnings. Nonetheless, on the off chance that the investor feels the exchange rate for country A's currency will move against them over the life of the deposit, the investor may hedge against that risk with a dual currency deposit option. At maturity, the counterparty will repay the investor in their home currency. The downside, of course, is in the event that the exchange rate moves the other way, it would be more productive to stay in the currency of Country An and localize the funds after the deposit develops.
While the investor actually receives a similar amount contracted in the deposit contract, basically making a floor under its value, a problem emerges when the time has come to localize those funds. The exchange rate might be even less great than at the start of the deposit, and the investor will receive short of what they could have in any case received, perhaps not exactly the amount invested.
Features
- Dual currency deposits are structured investment products including two unique currencies.
- These instruments uncover a depositor/investor to both likely risk and reward in the currency markets.
- They join a deposit and a currency option, permitting a customer to deposit funds in a single currency and pull out them in an alternate one.
