Looking to grow your investment portfolio? Now you can earn potentially higher yields when you invest in a Premium Currency Investment (PCI).
What is a PCI?
A PCI is a structured - or customised - investment product that is linked to a pair of currencies. The tenor of a PCI can range from one week to three months. It is ideal when you want to:
- Enjoy higher interest rates
- Get potential gains from movements in foreign currency exchange
- Potentially optimise your money-making opportunities in as short as one week
What are the benefits?
- You will get a guaranteed interest rate that's potentially higher than term deposits, on a short-term investment
- PCI potentially buffers against the effects of holding a weakening currency
- Diversify your investment portfolio
What are some of the risks?
- Your investment (in base currency) and the interest amount (yield) may be converted into the alternate currency at a more disadvantageous rate than the spot rate at maturity, resulting in a loss of your initial investment amount should you convert the alternate currency amount back to the base currency.
- Where conversion applies at maturity, you may sustain exchange rate losses which may be greater than the interest earned on your initial investment amount
- PCI is not a form of currency deposit. It is a structured investment product and is not principal protected.
How to invest in a PCI:
1. Determine your base currency, investment amount and investment period
2. Select an alternate currency
3. Set an exchange rate, also known as the Target Conversion Rate (TCR), at which your initial investment could be converted to the alternate currency
How it works:
Let's assume you have funds of SGD100,000 and you don't mind holding AUD.
Let's say the Spot Exchange Rate between these two currencies is 1.2200. However, preferring to be more conservative you set a Target Conversion Rate (TCR) of 1.2150.
As you don't need the funds for the next month, you choose a one-month tenor.
At this stage, we will inform you of the guaranteed interest rate that you will enjoy. In this case, let's assume it is 8% p.a.
On Fixing Day (two business days before maturity), it will be determined whether your funds plus the guaranteed interest will be repaid in SGD or AUD.
|Scenario 1||Scenario 2|
|SGD weakens against AUD, compared to the TCR you have set. It now trades at 1.2250.||SGD strengthens against AUD to TCR or beyond the TCR that you have set. It now trades at 1.2050.|
|You will receive:
One-month's interest in SGD.
|You will receive:
One-month's interest in AUD converted at TCR of 1.2150.
(1/12 x 8% x 100,000)
(100,000 + 667) ÷ 1.2150
(if converted at AUD/SGD spot of 1.2050 at expiry, SGD equivalent is SGD99,838, a shortfall of SGD162)
The actual profit/shortfall is dependent on the spot AUD/SGD at expiration.
What are your available options if your SGD is converted into AUD?
- You can put your AUD into an ordinary fixed deposit account to enjoy an interest rate that is usually higher than most SGD fixed deposit accounts.
- You can wait for the AUD to appreciate back to 1.2150 or higher. You can then decide if you want to convert the funds back to SGD.
- You can remit the funds to Australia, e.g. to pay for your child's tuition fees.
- You can open another Premium Currency Investment account with AUD as your base currency and SGD as the alternate currency, to earn another round of higher interest rate. You may again set the TCR at the same level of 1.2150.