All You Need to Know about Dual Currency Investment

Given today’s economically volatile markets, investors have a plethora of investment choices with varying degrees of risk, tenure, and principal protection. A majority of these investment opportunities are not for the faint-hearted and demand incredibly thoughtful investment decisions.

Contents

  1. Dual Currency Investment Explained
  2. Dual Currency Strategies
  3. Dual Currency Investment Risks
  4. Conclusion

Because of this, most investors tend to fall back on tried-and-tested safe investments types. However, for the high-risk appetite investor, there is another option worth exploring- Dual currency investment (DCI). It’s an attractive investment option that provides an opportunity for even higher yields.

Dual Currency Investment Explained

Dual currency investment is a short-term currency-based investment product that offers you the opportunity to earn potentially higher returns on currency market investments. It provides greater yields within a shorter tenure (1 to 3 months), which makes it a more attractive option over traditional fixed deposits. It’s an instrument of dual currency trading that offers investors the option to trade foreign currency-denominated securities such as USD, Euro, and GBP. Once an investment matures, an investor will receive an enhanced yield on top of the principal sum, delivered in either the base currency or the alternate currency.

A dual currency deposit helps a depositor take advantage of relative differences in two currencies. It’s also known as a dual currency instrument or dual currency product. A bank customer can deposit one currency and withdraw the money in a different currency if it’s advantageous to do so. Because of the currency risks involved, dual currency deposits tend to offer higher interest rates. Moreover, the option is relatively low key and requires a sizable minimum outlay depending on the financial institutions and geographical location. Therefore, it’s only offered to a select number of investors.

Dual Currency Strategies

Even though DCI offers higher returns than other money market investments, they are significantly riskier. Fortunately, there are a few strategies that could help you maneuver towards a highly rewarding portfolio. Some of these strategies include:

Set Clear and Achievable Goals

The currency trading market can be tempting at times. Therefore, it’s crucial that you set clear and achievable goals to minimize the risk of loss. Moreover, it’s essential to understand that the higher the return target, the higher the risk.

Know Your Currencies

It’s always an excellent strategy to select currencies that are guaranteed to work to your advantage. If the principal currency isn’t performing, you should be able to convert it to a more favorable currency. Furthermore, it’s recommended to diversify your portfolio to help reduce unexpected conversion risks.

Have a Long-Term Plan

Having a long-term plan ensures that if the market drastically falls, you will have an alternative to ensure that you resurface. Moreover, it will ensure that you have enough time to allocate your funds accordingly.

Time is of the Essence

A DCI is extremely time-sensitive. You may find yourself missing out on more than a few shots. If it happens, it’s crucial that you wait for another suitable chance. Charting tools combined with enough practice can help you predict the right time for trading in the long-term.

Dual Currency Investment Risks

In all its benefit and rewarding opportunities, DCI also has its fair share of imperfections. An investor should bear in mind that just like other investments, there are obvious risks. They include:

  • Non-Principal Protection

DCI holds a higher risk as it does not have principal protection. Moreover, the principal amount of the investment is not guaranteed, which translates to lower returns in worst-case scenarios or capital loss when there is an early withdrawal or placement is terminated.

  • Non-Insured Deposit

DCI is categorized as being outside the confines of an insured deposit. This is according to the Deposit Insurance & Policy Owner’s Protection Schemes Act 2011 (Act 15 of 2011).

  • Foreign Exchange Risk

DCI is an investment product embedded with a currency option. It’s not a foreign currency deposit or an ordinary time deposit. Therefore, the actual return of an investment may be negative if the base currency is paid in the alternate currency, or, when the alternate currency is converted back to the base currency. Of course, this is dependent on the market rate.

  • Early Termination or Withdrawal

According to the T&C’s of a DCI, a bank may, at its discretion, deduct losses, expenses, or additional costs associated with early termination or withdrawal. It results in a lower rate of return or a loss of the initial base principal amount invested by the investor.

Conclusion

With more and more banks offering access to a dual currency account, the market is attracting more interest and has opened up to even more investors. Over-time, DCIs have provided another option for taking advantage of unfolding events on a global scale. However, before engaging in anything, it’s wise that you consult with an expert that understands the market. Ensure it’s someone who can help you determine if DCIs are an appropriate investment for your portfolio.

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