How to invest in different currencies

Private Banking clients are increasingly more interested in investing in different currencies. Structured products offer solutions to materialise this type of investment idea.

Dual currency notes are an interesting alternative if you wish to receive interest above market rates in some of the currencies involved, with a short-term investment horizon.

Technically, the product’s construction is quite simple. It is based on the creation of a deposit in the investment reference currency, including selling a put option on the alternative currency and buying a call option on the investment currency. This generates interest above market levels as a result of the interest rate from the deposit in investment currency and the income from selling the option.

Let’s imagine that a client has USD 1MM to invest and chooses the EURO as an alternative currency.

The EUR/USD interest rate is 1.209.

The matrix below shows different combinations of terms and strikes and the resulting annual yield:

For reference, we will use the combination of 3 months and a strike price of 1.14 with an annual yield of 8.00%. The product will perform as follows:

• On the product’s observation date (3 months), if the EUR/USD exchange rate is higher than the strike level (1.1400), it is received the invested nominal plus a coupon of 8.00% p.a., i.e. with the equivalent final amount of USD 1,020 MM. This represents USD 20,000 in interest.

 

• On the maturity date, if the EUR/USD exchange rate is the same or higher than the selected strike (1.30), the client receives the invested nominal plus the coupon converted to EUR at the defined strike (1.1400), i.e. EUR 894,736.84.

 

Dealing with currencies is not a risk-free operation. If the exchange rate’s performance goes against expectations, the client receives the coupon and the invested nominal converted to the alternative currency at the defined strike; there may be a loss of capital.

In addition to its simplicity and transparency, it is attractive because of its contracting flexibility and dynamism since you can operate with more than 20 currencies and with terms between 1 week and 1 year.

This is just an example. Please contact always your relationship manager in order to get more information about how to invest in different currencies.