An investor gets a better interest rate than the normal market rates by entering a Dual Currency Deposit product. On the other hand investor will ve the risk to receive his principle in another currency if some prefined contitions are met. DCD product owner defines a strike level for a currency pair. This strike level can be higher than the current spot rate or can be lower than the current spot rate.
For the USD/TRY currency pair, if spot rate is 1.5500;
If customer has a principal of 1,000,000 USD and executed a DCD product from the 1.6000 strike level. If the spot rate at expiry is 1.6500 than the investor has the obligation to sell his 1,000,000 USD principal and buy TRY against from the level of 1.6000 (The strike level of 1.6000 is at a disadvantege level according to the spot rate at expiry which is 1.6500)
If customer has a principal of 1,000,000 TRY and executed a DCD product from the 1.5000 strike level. If the spot rate at expiry is 1.4500 than the investor has the obligation to buy 1,000,000 TRY equilavent USD and sell his 1,000,000 TRY from the level of 1.5000 (The strike level of 1.5000 is at a disadvantege level according to the spot rate at expiry which is 1.4500)
DCD product is formed of oneshort position on a vanilla option and one deposit. The premium received by selling the option is used to increase the deposit interest rate. If the option which is sold is exercised by the counterparty than the investor has the risk to have a loss from the initial principal amount. In the first example above, the 1.6000 level is the strike price of the Call option. On the other hand in the second example 1.4500 level is the strike price of the put option which is used in the DCD product.
Applications:
DCD transactions are one of the most popular structured products for investment purposes. Investors generaly sell the option from an out of the money level. Mostly the risk of the product is disregarded when concentrated on the total interest rate. (Deposit rate + option premium) On the other hand DCD products do not include any leverage.
Advantages:
-
If the price of the currency pair moves
sideways investor probably gets his prncipal from the initial currency type.
-
The ineterest rate of the DCD product is much
greater than the normal deposit rates.
Disadvantages:
-
If the spot price at expiry
date is at a disadvantage level for the investor then investor has to make fx
transaction from a disadvante level according to the spot price.
