A DCI investor gives up the Right on the currency of Deposit and may get his/her Deposit converted into another (chosen) currency at the discretion of the Bank on a specific date and time. In return, the investor gets a higher interest rate yield compared to a normal Deposit.
The investor can chose the Strike (conversion rate) at which the DCI is set and the Tenor of this product but Cannot chose the outcome.
The investor is subject to capital gains/losses if and when the Bank so choses to Exercise their Right on the Maturity date and time of the DCI.
Pros:
- Higher Yields when compared to normal Deposits
- Investor may have a target FX rate at which they are willing to convert into another currency.
- Your upside is capped by the higher yield you get from the DCI.
- FX Capital losses
- Banks will definitely not Exercise their Right if the market prices goes against them. So when you are converted at the Strike, you are most likely to be at a loss if you have to convert back to the original currency of Deposit
- Locked in - breakage is normally not allowed and there may be costs incurred to un-wind the DCI and that could entail you losing part of your principal in addition to the loss of interest on the investment.
Below is a diagram for illustration:
On the horizontal axis, towards the left of the screen means the FX price of AUDUSD (with original deposit being AUD). So this meants that if the DCI has been converted by the bank and the price of AUDUSD goes higher, the investor is sitting on potential losses if the investor converts his USD equivalent bank into AUD.
The vertical axis shows the profit/loss situation.
But it's not all doom and gloom. This is useful if the investor has a target rate at which he/she is happy to be converted into a chosen currency on maturity.
If the investor is astute enough (or lucky!), ther are strategies one can adopt to participate in the foreign exchange markets to improve their returns.
A DCI is also a Structured Product. Due to the popularity of DCI's in Asia, a separate page is dedicated to this.
This topic will be coverd as a feature in the future.
