Dual Currency Deposits

[Amaterasu]

Can anyone explain about how this works and the risk involved ? I considering DCD and Structured Deposits for amount slightly below 80k.

 

[Keverus]

what's your goal? this sum of money meant for what?

 

[Shiny Things]

Can anyone explain about how this works and the risk involved ? I considering DCD and Structured Deposits for amount slightly below 80k.

Sure. I used to do these things all the time, on both sides of the desk. Here's how they work.

From your point of view: you deposit some money in the original currency. You pick a currency you want to get converted to, and a level where you'd be happy to be converted at. Based on the alternate currency, the level (aka the "strike"), and the tenor of the deposit, the bank gives you an enhanced interest rate. (These things usually run for a week to a month; longer than that is rare.)

At maturity, you get the interest and the principal back, BUT...

* If the alternate currency has weakened through your strike level, the bank will convert the principal and interest at the strike level and repay you in the alternate currency.
* If the alternate currency has strengthened, you get repaid in the original currency.

So the tradeoff in return for getting the higher interest rate is that you always get repaid in the weaker currency.

DCDs and structured deposits are almost always a bad idea, because the banks rip out huge amounts in invisible fees. DCDs can be a useful idea if you need to convert some cash but you're not particularly fussed about when you convert it, but they're absolutely the wrong place to stick an investment fund.

 

[jace88]

DCDs and structured deposits are almost always a bad idea, because the banks rip out huge amounts in invisible fees. DCDs can be a useful idea if you need to convert some cash but you're not particularly fussed about when you convert it, but they're absolutely the wrong place to stick an investment fund.

Precisely this. If this is the goal/objective, then it's one way to earn a bit of return whilst you wait to convert at a price you specify. Ultimately though, you're just writing options at a cheap premium but it's all handled for you by a happy RM.

 

[Amaterasu]

Sure. I used to do these things all the time, on both sides of the desk. Here's how they work.

From your point of view: you deposit some money in the original currency. You pick a currency you want to get converted to, and a level where you'd be happy to be converted at. Based on the alternate currency, the level (aka the "strike"), and the tenor of the deposit, the bank gives you an enhanced interest rate. (These things usually run for a week to a month; longer than that is rare.)

At maturity, you get the interest and the principal back, BUT...

* If the alternate currency has weakened through your strike level, the bank will convert the principal and interest at the strike level and repay you in the alternate currency.
* If the alternate currency has strengthened, you get repaid in the original currency.

So the tradeoff in return for getting the higher interest rate is that you always get repaid in the weaker currency.

DCDs and structured deposits are almost always a bad idea, because the banks rip out huge amounts in invisible fees. DCDs can be a useful idea if you need to convert some cash but you're not particularly fussed about when you convert it, but they're absolutely the wrong place to stick an investment fund.

Thanks for the insight. What negatives does structure deposit comprise besides recalls ? We all know about its slightly higher returns versus a traditional time deposit.

Besides time deposits, I still looking around for options to place these mentioned funds.

 

[Keverus]

What negatives does structure deposit comprise besides recalls ? We all know about its slightly higher returns versus a traditional time deposit.
.

There are generally a few common types of structured deposits that banks run.

1. Equity-linked
2. Commodities-linked
3. FX-linked
4. Interest rate-linked

SDs give you 100% capital protection, meaning even if the economy goes into recession the next 10 years, you put 80k, you get back 80k at maturity.

Do note that if you choose to terminate before the maturity date, you would most definitely lose a portion of your capital.

That's the upside. If your investment time horizon matches, you will not lose a single cent FOR SURE.

The downside? Your returns could be anything from zero to a small portion of the bank's investment returns using your capital.

For instance, let's talk about equity-linked SD. perhaps your SD would be pegged to 3 counters, maybe UOB, Keppel Corp and Capita-land. Possible scenarios:

1. All three companies make huge profits, share price move up by 10%. You probably only get 2%.
2. All three companies make profits, but only 5%. you might end up getting no share of the profit because the terms of the SD state that for any profit sharing, the companies must make more than 7% for instance.

Such SDs are very closely-linked with investments (be it FX, equities or commodities). The bank usually offer the SD in a manner whereby they pay you a certain fixed interest (maybe 1+% ) and a variable return (dependent on the underlying assets as explained above).

Then there are interest-rate linked SDs. This is pretty common right now, I think OCBC, SCB and Maybank ran it quite aggressively. Here's how it can look like:
Year 1: guaranteed 1.5%
Year 2: guaranteed 1.6%
Year 3: guaranteed 1.7%
and so on..

The good thing is you know for sure how much you're getting (unless recall) and when (half annual, annual, quarterly payments).

The downside? If interest rates rise and FD rates rise: say in Year 2, FD rate is at 2%, then you have an opportunity cost of 0.4% differential. While everyone else is getting 2% of interest on their deposit, you're merely getting 1.6%. Most banks have an option to terminate SDs early, but do you really think they would, when they're getting the better deal? And this is probably the reason why the banks have been running such SDs very aggressively for the last few years, in preparation for the rising interest rates that has already happened.

At the end of the day, wherever you put the funds, it has to fit your objectives and risk appetite. A lot of things can look attractive, but never forget your own purpose.

EDIT: spelling

 

[Shiny Things]

Thanks for the insight. What negatives does structure deposit comprise besides recalls ? We all know about its slightly higher returns versus a traditional time deposit.

Besides time deposits, I still looking around for options to place these mentioned funds.

The downsides of a structured deposit depend on the actual structure of the product (is it capital-protected, is it a reverse convertible, is it a basket thingy, etc etc) but basically the reason these are a bad idea is that the bank is ripping you off.

Whenever you do a structured deposit, you're almost always selling options to create that slightly higher return. So what the banks do is they don't pay you as much for that option as they should - usually they'll take half or a quarter of the theoretical option price as their fees.

So if you actually want the exposure that the structured deposit is giving you, then there are much cheaper ways to get it. And if you don't understand the exposure that the deposit is giving you - if you don't understand exactly what your worst-case outcome is, what circumstances you'll get that worst-case outcome, etc etc - then you should never invest in them.

 

[jayou8]

The downsides of a structured deposit depend on the actual structure of the product (is it capital-protected, is it a reverse convertible, is it a basket thingy, etc etc) but basically the reason these are a bad idea is that the bank is ripping you off.

Whenever you do a structured deposit, you're almost always selling options to create that slightly higher return. So what the banks do is they don't pay you as much for that option as they should - usually they'll take half or a quarter of the theoretical option price as their fees.

So if you actually want the exposure that the structured deposit is giving you, then there are much cheaper ways to get it. And if you don't understand the exposure that the deposit is giving you - if you don't understand exactly what your worst-case outcome is, what circumstances you'll get that worst-case outcome, etc etc - then you should never invest in them.

Is it worthwhile for retail to structure the deposit by yourself? Let's say sell the fx option in Saxo? I think you mentioned somewhere before the spreads in Saxo in not that great. So just wondering if it is worth it.