Understanding foreign currency fixed deposit

Written on July 24, 2009 – 10:02 am | by Kampung Boy |

Foreign currency fixed deposit (FCFD) is one of of the many method of investment which is provided to the public. One can even place the tenure for investment as short as 1 day. Not only that, you can also use the FCFD to lock in favorable exchange rates for your foreign currency needs.

Let’s get down to business to get a further understanding on foreign currency fixed deposit.

Higher minimum deposit compared to fixed deposit

Most FCFD accounts need a higher deposit if compared with fixed deposit. So far, i have seen CIMB FCFD minimum deposit amount is set at RM 10000.

Guaranteed interest is that true?

FCFD is guaranteed interest but will be paid out upon maturity.

What is the risk involved?

How much you get on your FCFD it all depends on the current currency rate of your investment. It fluctuates very volatile. Yes, FCFD has guaranteed returns but the returns will depend on the market value of your currency.

Example of how FCFD works

Just you say start with an initial deposit of RM 10000 in a Australian Dollar (AUD) FD for 12 month tenure at an interest rate of 8.00% per annum.

At the point of investment, the selling price of Aussie Dollar is RM2.50. Hence it will be converted to AU$4000.

RM10000/AU$2.50 = AU$4000
After one year, your AUD has grown to AU$4320.
8% x AU$4000 = AU$320
Total AUD in hand = (4000 + 320)AU$ = AU$ 4320

After one year, the exchange rate moves up and the Buying TT rate is RM2.60. If you choose to uplift your FD and convert to Ringgit you will receive :-

AU$4320 x RM2.6 = RM11232
Effective return = 12.32%

After one year, the exchange rate moves down and the Buying TT rate is RM2.20 If you choose to uplift your FD and convert to Ringgit you will receive :-

AU$4320 x 2.2 = RM9504
Effective Return = -4.96%

Conclusion

FCFD is another tool for you to diversify your investment portfolio. The risk of FCFD is much higher compared to fixed deposit hence the return is also higher if everything goes smoothly.

From the example i have shown above, although FCFD has guaranteed interest rate, but it does not mean you will never be on the loosing side. It will happen if the currency that you invested on has drop in value.

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