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Dual-currency deposits
Old 10-24-2012, 08:23 AM   #1
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Dual-currency deposits

My bank is trying to sell me a dual-currency deposit as a way to improve the yield on some of my cash investments.

Does anyone have experience with these? A few years ago, when I needed GBP to pay for my kids edumacation, this might have been more attractive to me, but at the moment I don't need any currency other than my home one (EUR).

Having seen the discussion here I feel that I understand the downsides, but I wonder if anyone has found the "sweet spot" between period, spread, and risk?

Age 55, retired July 1, 2012; DW is 59 and working for 4 more years. Current portfolio is 1950K split 50 stocks/20 bonds/30 cash. Renting house, no debts.
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Old 10-24-2012, 02:01 PM   #2
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While I'm happy to diversify in currency using unhedged international stock mutual funds, I would think diversifying cash in the same manner is just running up the risk in search of better yield. Another thing you have to research and worry about.

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Old 10-24-2012, 04:15 PM   #3
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I have no reason to search for yield with other currency....

It might not be true anymore, but when I was in college they taught us that the different rate was usually due to a falling currency... IOW, what you made in rates you lost when exchanged back to home currency...

Now, if you are trying to play the exchange rates.... that is a different story...
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Old 10-24-2012, 04:37 PM   #4
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The linked article pretty much has it right - you are basically writing a put option on the other currency to the bank. You get the higher interest rate (a combination of normal interest and option premium) in exchange for assuming some FX risk.

Assuming the terms are the same as what I have been offered out here, you will be locked in until maturity - unlike an exchange traded option you do not have the ability to close out your position before maturity. (There are other differences as well.)

Personally, I use them on occasion but only for currency pairs where I am happy holding either currency for the longer term. Quite frankly, they are not that attractive from a risk-reward perspective.
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