Foreign Currency Fixed Deposit (FCFD)

What Is a Foreign Currency Fixed Deposit (FCFD)?

A Foreign Currency Fixed Deposit (FCFD) is a fixed investment instrument in which a specific sum of money that is ready to earn interest is deposited into a bank.

Albeit fixed deposits have for all intents and purposes no risk, foreign currency fixed deposits present an element of exchange rate risk since investors must exchange their currency into the target currency and afterward convert it back again once the term is finished.

Understanding a Foreign Currency Fixed Deposit (FCFD)

A foreign currency fixed deposit is a type of time deposit issued by banks to investors who might want to keep foreign currency for sometime later or hedge against foreign currency variance. The money deposited in the FCFD account can't be removed until the agreed fixed term has expired.

At the point when foreign currency fixed deposits are bigger and longer in duration, they receive a lot higher interest rates. A FCFD can be an extremely helpful and safe method for investing your money. Nonetheless, depositors must ensure that they needn't bother with that money for the whole duration of the term. On the off chance that an investor pulls out the funds prior to maturity, a early withdrawal penalty would apply, which is many times steep and set at the prudence of the bank.

The early redemption of a foreign currency fixed deposit will probably bring about the partial loss of the principal sum due to the combined effects of the redemption charges and bid-ask spread charges.

Benefits of a Foreign Currency Fixed Deposit

There are a number of justifications for why a FCFD investment requests to certain investors. Investors who need some diversification in their portfolios might opt for FCFDs in another currency. Companies looking to hedge against foreign exchange movements might involve the FCFD as a hedging instrument. For such companies, a FCFD is utilized to work with cross-currency swaps. Investors who need exposure to a target currency since they invest abroad, have children concentrating on in a given country, or conduct business in another country might invest in FCFDs.

A FCFD can be invested in two ways — opening a neighborhood account that offers deposits in the foreign currency that the investor might want to gain exposure to or opening an account in the foreign country itself. Interest rates, least deposits, tenure periods, and accessible currencies fluctuate from one bank to another.

Illustration of a Foreign Currency Fixed Deposit

For instance, A Canadian investor who has CAD dollars however needs to hold U.S. dollars can deposit USD into a US dollar-named FCFD paying a higher interest rate than a nearby Canadian savings account. To do this, the investor should purchase US dollars from the responsible bank utilizing his Canadian dollars. After the US dollars are purchased, they are deposited into the FCFD.

USD/CAD is quoted as 1.29 from a FCFD giving bank. An investor that needs to deposit $100,000 will buy USD at the rate of 1.29 from the bank by selling CAD 129,000. The $100,000 is deposited in the FCFD account for one year and earns an annual interest of 1.5%. After the tenure finishes, the USD is sold for CAD at the predominant foreign exchange rate offered by the responsible bank.

Investors who don't expect foreign exchange rates to move against them will ordinarily utilize a FCFD. In any case, all FCFD investors face foreign exchange risk given that assuming there is an adverse movement in the exchange rate, the transaction costs and exchange rate difference could nullify any excess interest returns or even put the investor in losses.

Following our model above, toward the finish of the term, the investor earns 1.5% x $100,000 = $1,500. In any case, the bank is simply able to purchase USD at a rate of 1.21. This means that the investor will receive Canadian dollars worth $101,500 x 1.21 = CAD 122,815. As may be obvious, this amount is below the investor's original investment amount of CAD 129,000.

Features

The money deposited in a FCFD earns interest however accompanies some currency exchange risk.
A foreign currency fixed deposit is a fixed-income investment for keeping foreign currency.
Money in a FCFD account can't be removed until the fixed term is up.
Investors use FCFD accounts to broaden or hedge against foreign currency movements.