How does currency-linked investments work in Singapore?
You start currency-linked investments by making a few decision.
First, you choose the original base currency that you want to invest in your currency-linked investments like Singapore dollars.
Second, you choose the alternate currency for this currency-linked investments e.g. Swiss Franc.
Third, you agree on a strike rate (exchange rate) which you are comfortable in exchanging your base currency with the alternate currency in this currency-linked investments.
Fourth, you choose a tenor for your currency-linked investments.
After these steps, the bank will determine an enhanced yield e.g. 5% for your currency-linked investments.
At the end of the currency-linked investments tenor, the bank will return you your principal sum plus the interest yield of 5% that is paid out either in your base currency or alternate currency.
Thus you would have made a return of 5% on your currency linked investments at the end of this tenor, on paper.
Currency Linked Investment (CLI) is a dual currency investment, which gives the bank the right to repay you at a future date your principal and enhanced yield earned in either the base or the alternate currency, regardless of your preference at the relevant time.
Dual currency linked investments are subject to foreign exchange fluctuations, which may affect the return of your investment.
Exchange controls may also be applicable to the currencies your dual currency linked investment is linked to which may result in the loss of your principal sum.
The customer is taking on the credit risk of the bank with respect to all payments due under a currency linked investments.
In the worst-case scenario, where the bank becomes insolvent, you will receive zero return and lose your entire original investment amount.
In general, changes in interest rates in the country issuing the alternate currency relative to interest rates in the country issuing the base currency may affect the future value of the base currency relative to the alternate currency, as implied by currency futures contracts, which would generally affect the value of the currency-linked investments.
Interest rates may also affect the economy of a country issuing the relevant currencies and, in turn, the exchange rates and therefore the values of the currencies relative to one another.
The interest rates for the base currency, with regards to the interest rate volatility, from time to time, may continue to be volatile.
An investment in a currency-linked investments involves risks and should only be made after assessing, for example, the direction, timing and magnitude of potential future changes in the movement of interest rates, exchange rates and the terms and conditions of the currency-linked investments.
More than one risk factor may have simultaneous effects with regard to the currency-linked investments such that the effect of a particular risk factor may not be predictable.
In addition, more than one risk factor may have a compounding effect on your currency-linked investments, which may not be predictable.
No assurance can be given as to the effect that any combination of risk factors may have on the value of a currency-linked investments.
Editor
Investments Singapore
Investments Singapore