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By Jessica Wee

With borders reopening and international trading picking up, some of you must be researching ways to make your Ringgit/Dollar stretch further.

Let me share what my former clients would do when it comes to converting their base currency into foreign currencies (FX).

If you are not rushing for a trip, willing to take some risks and looking for yields in FX, you can consider a dual currency investment aka DCI.

You will need to have access to this investment through your local banks.

Mind you, there is quite a heap of paperwork to sign off before you’re allowed to trade in DCI as it is a non-principal protected financial product(1).

So what is DCI?

This investment product combines two financial instruments namely FX Options (derivatives) and Deposits (non-derivatives) that can provide higher interest rates than conventional deposits.

It is suitable for investors that have exposure in two currencies and looking to earn a yield.

Typically you need to have a base currency eg: USD and an alternative currency eg: GBP. You choose the Base Currency, which is expected to depreciate against the Alternative Currency. The interest rate level along with the strike rate at which the Base Currency may be converted into the Alternate Currency is agreed at the outset of the investment. Payment schedules will also be in the contract note.

How can the rates work to your advantage?

If you are always investing your money in a time deposit (aka fixed deposit), you need to consider DCI as it will give you a higher interest rate as long as you are comfortable holding the alternate currency if a conversion happens. Shorter tenor ie 1 or 2 weeks will usually give you the highest yield.

Eg: You hold currency X and you want to change it to currency Y. At the money changer, the rate is 3.00. Current bank rate is 2.99. When you invest in DCI, you can choose to get currency Y at 2.97 while being paid a guaranteed interest that is high!

If conversion happens, you will get currency Y at 2.97 with interest. If the conversion does not happen, you will continue to hold currency X while being paid interest.

The Risks

The risk is that the investment may still need to be converted back to the home currency at a future date with a less favorable exchange rate. The investor can choose to hold these funds in the foreign currency in hopes that the exchange rate will eventually move in their favor, or exchange them immediately, perhaps at a loss, to free up the funds for future trades.

The minimum investment is usually ~USD12,000 depending on the bank’s policy.

1. Non-Principal Protected Note Securities (NPPNs) are products that allow clients to customize return to suit their investment needs. Traditional equity investments provide full exposure to the market, whether the performance is positive or negative.

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