Formal Definition
A Dual Currency Deposit (“DCD”) is a foreign exchange linked deposit in which the principal can be repaid after being converted into the alternative currency at the strike rate at maturity depending on the spot foreign exchange rate. If an investor has a view on the initial investment currency a Dual Currency strategy allows the investor to benefit from higher returns. The returns are higher than the returns on normal deposits in compensation for the higher risks that are associated with DCDs due to being exposed to foreign exchange. At maturity, if the local currency is weaker than the strike rate funds will be redeemed in the local currency. If the local currency is stronger than the strike, the principal is repaid in the alternative currency, converted at the strike rate The distance from current exchange rate to “strike” is determined by investor risk appetite: If the client is comfortable with risk the conversion level will be closer to the current level, the interest payable will be higher as the risk of conversion increases.
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