A dual currency deposit is a money market fund combined with a foreign exchange deposit option. This gives the investor the potential advantage, in addition to the risk, of changes in the wider foreign market. There are several different term options for dual currency deposits. They can range from as long as a year to only one week. This kind of investment is also known as a dual currency instrument.
Dual currency deposit can be paid out in a couple of different ways. If it does not reach a predetermined strike point, the funds will be paid in the original currency. When the investment does reach that strike point, the funds will be converted into a foreign currency, with the enhanced yield paid out in the original currency. A couple of days before the fund matures, the money manager will typically contact the investor to reveal which way the investment will be handled.
In most cases, a dual currency deposit will lock into a particular exchange rate, rather than making returns based on the current rate. The primary risk of a dual currency deposit is the chance of losing money when the locked rate is lower than the current market. This kind of investment can be returned in the original or foreign currency.
One of the primary benefits of a dual currency deposit is that it offers the chance of much higher returns than are usually seen with a low-income fund such as a money market. This is compensation for the additional risk the investor takes by investing in the foreign market. The investor may also improve the chances of a higher return by planning the conversion of funds at the most beneficial time. This flexible situation is known as variable terms. In essence, the investor can decide when to convert based on his or her tolerance for risk.
Some investors will use a dual currency deposit to make gains on cash while simultaneously changing it into useable foreign currency. For example, the profits made on an investment in an individual’s own country can be used in the agreed-upon foreign country in the investment. One of the benefits of managing gains this way is that there are no currency conversion fees. There is also the potential that the foreign exchange rate will be advantageous to the investor.
Many investors who use the dual currency deposit already have more than one kind of currency in their portfolios. The investment can also be used to increase portfolio diversity. This type of investment typically has a fairly high minimum deposit amount.