If you have international financial interests, own property abroad or regularly work in another country you might be interested in what a Dual Currency Placement (DCP) could do for you. They carry higher risks than conventional short- term savings, but they can also offer potentially greater returns.
A Dual Currency Placement is a complex foreign exchange investment that lets you make short term placements, for one week, two weeks or a month, of a minimum of £10,000 or equivalent in another currency. You can choose a base currency and an alternative currency from a list of globally available currencies.
You may be paid in either currency depending on how the foreign exchange markets perform. DCP arrangements are only appropriate if you already hold or have a need for both currencies.
A Dual Currency Placement is the sale of a fully covered call option on your base currency versus your chosen alternative currency. There is no leverage involved and you only sell the amount you have placed at the exchange rate (strike rate) that you have chosen. You receive the money market deposit interest rate plus an option premium for the chosen time frame of the placement.
The Option Premium is determined by the movement in foreign currency exchange rates, potentially making your returns higher. It must be noted that such returns are not certain and that Dual Currency Placements do not offer the same protection as a traditional savings account as you may lose the principal sum if you convert back to your base currency.
Base Currency: GBP
Alternate Currency: EUR
Amount: 10,000 GBP
Current Market Exchange rate: 1 GBP = 1.15 EUR (1 GBP buys 1.15 EUR)
Preferred Conversion Rate or Strike: 1 GBP = 1.17 EUR (1 GBP buys 1.17 EUR)
Time frame for placement: 1 Month
Current 1 Month GBP Money Market deposit rate: 0.25% AER
Option Premium: 7.85% AER (based on 1.17 EUR preferred conversion rate)
Total Premium or Return to be paid: 8.10% AER (0.25% AER + 7.85% AER)
At the end of the 1 Month time frame referred to as the ‘expiry or maturity date’ there are two scenarios:
If GBPEUR stays below 1.17 EUR, you will remain in pounds and earn 8.10% AER (Annual Equivalent Rate) or £67.50 over one month. The balance of your account will be £10,067.50.
£10,000 X 8.10% = £810 / 12 = £67.50
If after one month GBPEUR is at 1.17 EUR or above, you still earn 8.10% AER or £67.50. However, now the whole £10,067.50 is converted at 1.17 EUR. You will now have 11,778.98 EUROs in your account.
£10,067.50 X 1.17 EUR = 11,778.98 EUR
If at the ‘expiry date’ the prevailing Market Exchange Rate is 1 GBP = 1.20 EUR and you decide to convert back into pounds there will be a Capital Loss:
11,778.98 EUR / 1.20 EUR = £9,815.82 which is less than the initial placement of £10,000.
Losses could be greater if there is an adverse movement in the exchange rate.
You will not have access to your Initial Placement during the chosen time frame since, once a Dual Currency Placement is set up, you cannot cancel it and no withdrawals are allowed before the end of the chosen time frame.
It is important that you are happy to remain in either the Base Currency or receive the Alternate Currency at the exchange rate you selected when the Dual Currency Placement matures. They best suit clients who already operate in more than one of the available currencies. For example, if you live in one country and work regularly in another, own a second home abroad or if you have children studying or working in another country, a Dual Currency Placement may potentially be appropriate for you.
Risk to Capital: You could receive less than your Initial Placement if, at the Expiry Date, you choose to convert the Alternate Currency back into the Base Currency, as this will be done at the prevailing exchange rate (please refer to example above).
Credit Risk: You assume the full credit risk of the Counterparty Bank or Placement Taker this means that should any of these entities become insolvent or fail in any other way, you will be an unsecured creditor and might not receive back any of your Initial placement or your Total Return. Even though we use highly rated counterparty banks (Placement Takers) to execute your Dual Currency placement the credit risk rating of the counterparty bank by a rating agency (like Moody’s, Standard & Poor’s and/or Fitch) may change during the lifetime of the product.
Liquidity Risk: You cannot sell or buy a Dual Currency Placement on a secondary market. It must be held until the Expiry or Maturity End Date indicated. It will have no mark-to-market valuation during its lifetime.
Tax Risk: There may be tax implications to taking out a Dual Currency Placement. You should have good knowledge of your tax position, or seek professional tax advice.
Foreign Exchange Risk: Exchange rates are very difficult, if not impossible, to predict. Economic differences between countries – in such areas as national income, money growth, inflation and trade balances have long been considered critical determinants of currency values.