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by Teck Leng Tan, Asian Forex
Strategist, UBS Wealth Management
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The current economic climate calls for smart investments. Structured assets such as dual-currency investments (DCIs) and precious-metal-linked investments (PMLIs) may help improve portfolio returns. With DCIs, investors can choose a primary and alternative currency and, at maturity, receive either the principal plus interest earned in the base currency, or the alternative currency at a pre-arranged rate.
DCIs offer higher returns than standard money-market investments without capital protection; a PMLI does the same, but is linked to a precious-metal exchange rate. Nothing is ever risk free, but to ensure long-term success in these instruments, the following rules may be used as benchmarks. As always, consult your client advisor to know your risks and set your goals.
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Invest with long-term goals and controlled risk. Define your allocation between principal and alternative currencies, your average excess-return target, and how to handle converted positions.
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Define the investment currency. Strategic investors should initially define their reference currency and long-term currency allocation target. They should be prepared to hold an alternative currency temporarily, with the sole aim of improving the long-term return on the primary investment currency.
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Define your risk sentiment and return target. Know your goal for excess returns. The higher the target, the greater the risk, and this results in more conversions and greater fluctuations in portfolio value.
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Know the alternative currencies. In cases of undesirable conversions, knowledgeable investors can make better decisions on how to reconvert the alternative currency into the principal currency.
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Diversify sensibly. Hold various DCIs with different alternative currencies and/or expiry dates. This reduces conversion risk in case of unexpected currency movements.
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Know how you will handle undesirable conversions, which occur when the alternative currency falls sharply and the investor takes delivery. Investors can then decide quickly between pre-prepared courses of action to limit losses.
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Avoid alternative currencies at risk of long-term depreciation. As a guide, focus on long-term currency forecasts.
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Use charting techniques and bandwidths. These analysis tools offer clues to exchange rate stability. A DCI should ideally be made once the alternative currency’s value has fallen and the exchange rate has reached the edge of its normal trading range.
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Test conditions under various scenarios. Tactically astute investors compare the conditions for various strikes and expiry dates together with their financial advisors. Such comparisons may lead to relatively attractive strikes and returns.
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Remember that missed opportunities will come round again. DCIs are short-term and timing is key to performance. Investors should wait until the market provides them with the best conditions for their positions.
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