What Is a Foreign Currency Fixed Deposit (FCFD)?♊

A Foreign Currency Fixed Deposit (FCFD) is a fixed investment instrument in which a spec🦹ific sum of money that is poised to earn interest is deposited into a bank.

Although fixed deposits have virtually no risk, foreign currency fixed deposits introduce an element of exchange rate risk because investors must exchange their currency into the target currency and then convert it back ♑again once the term is over.

Understanding a Foreign Currency Fi🍸xed Deposit (FCF🤪D)

A foreign currency fixed deposit is a type of 澳洲幸运5开奖号码历史查询:time deposit issued by ba✃nks to investors who would like to 💖keep foreign currency for future use or hedge against foreign currency fluctuation. The money deposited in the FCFD account cannot be withdrawn until the agreed fixed term has expired. 

When foreign currency fixed deposits are larger and longer in duration, they receive much higher interest rates. An FCFD can be a very useful and safe way to invest your money. However, depositors must make sure that they do not need that money for the entire duration of the term. If an investor withdraws the funds prior to maturity, an 澳洲幸运5开奖号码历史查询:early withdrawal penalty would apply, ไwhich is often steep and set at the discretion of the bank.

The early redemption🧸 of a foreign currency fixed deposit will very likely re🐲sult in the partial loss of the principal sum due to the combined effects of the redemption charges and bid-ask spread charges.

Benefits of a Foreign Currency Fixed Deposit

There are a number of reasons why an FCFD investment appeals to certain investors. Investors who want some diversification in their portfolios may opt for FCFDs in another currency. Companies looking to hedge against foreign exchange movements may use the FCFD as a hedging tool. For such companies, an FCFD is used to facilitate 澳洲幸运5开奖号码历史查询:cross-currency swaps. Investors who want exposure to a target currency because they invest abroad, have children studying in a giv🍎en country, or conduct business in another country may inveꩵst in FCFDs.

An FCFD can be invested in two🗹 ways—opening a local account that offers deposits in the foreign currency that the investor would like to gain exposure to or opening an account in the foreign country itself. Interest rates, minimum deposits, tenure periods, and available currencies vary from bank to bank.

Example of a Foreign Currency Fixed Deposit

For example, A Canadian investor who has CAD dollars but wants to hold U.S. dollars can deposit USD into a US dollar-denominated FCFD paying a higher interest rate than 🔴a local Canadian savings accouꦕnt. To do this, the investor will have to purchase US dollars from the issuing bank using his Canadian dollars. After the US dollars are purchased, they are deposited into the FCFD.

USD/CAD is quoted as 1.29 from an F𒊎CFD issuing bank. An investor that wants to deposit $100,000 will buy USD at the rate of 1.29 from the bank by selling CAD 129,000. The $100,000 is deposited in the FCFD account for one year and earns an annual interest of 1.5%. After the tenure ends, the USD is sold for CAD at the prevailing foreign exchange rate offered by the issuing bank. 

Investors who do not expect foreign exchange rates to move against them will typically use an FCFD. However, all FCFD investors face 澳洲幸运5开奖号码历史查询:foreign exchange risk given that if there is an adverse movement in t♊he exchange rate, the transaction costs and exchange rate difference might negate any excess interest returns or even put the investor in losses. 

Following our example above, at the end of the term, the investor earns 1.5% x $100,000 = $1,500. However, the bank is only willing to purchase USD at a rate of 1.21. This means that the investor will receive Canadian dollars worth $101,500 x 1.21 = CAD 122,815. As you can tell, this amount is below the investor’s original investment amount of CAD 129,000.