Hello and welcome to this installment of “Derivatives Demystified.”
This week I’m sharing a more aggressive structured trade idea called a range-enhanced structured currency deposit, or RESCD for short. I often get asked for ideas on how to enhance rates that one can earn on USD deposits, and this is one of them.
I had so much fun (and saved quite a bit of time) letting AI write the product description, asking it to add a suitable amount of South-African flair. ChatGPT delivered more flair than this South African could’ve hoped for.
The text in bold was produced intelligently and artificially. My fingers typed my comments in italic according to what my genetic makeup, experiences, personality, and finite cognitive ability prescribed.
Range Enhanced Structured Currency Deposits is like a fancy financial thingamajig that combines structured deposits and currency vibes. It’s something the banks and big money peeps offer. Yes, it is. A RESCD combines a deposit and a forex options strategy. In this case, a double-no-touch currency option is purchased (which is a vibe!).
A RESCD lets you try your luck in the currency game and score some extra moola. You’re betting on the exchange rate staying within a certain range for a set period. Yes, by trading this product, you get exposure to a chosen underlying currency market and an enhanced return if the currency pair of your choice stays range-bound for the investment period. The product is tailored to any reference currency pair and for any term. So your initial investment can theoretically be in any currency too.
Here’s the lowdown on how it rolls:
1. You slap down a chunk of your hard-earned dough.
You invest a portion of your savings, for example, USD 10,000,000.
2. The RESCD tells you, “Hey, the exchange rate should chill between these two numbers for a while”.
A range is defined at the onset of the investment and determines whether you earn an enhanced yield on your deposit. For example, if USD/ZAR only trades between 17.60 and 22.00 for the duration of your investment, you will earn an enhanced yield.
3. The RESCD has a date when you cash out.
Let’s assume your investment is fixed for a term of three months.
4. If the exchange rate sticks to the range throughout the investment period, you get some sick returns. The details can get pretty wild.
Nothing too wild here. Should USD/ZAR stay within the 17.60 – 22.00 range, you will earn an enhanced yield of 6% on your USD deposit. You can compare this 6% to a fixed deposit rate of 4.55% to see the improvement.
5. Most RESCDs offer a safety net, so even if the exchange rate goes haywire, they promise to give you back your original investment.
That is true in our example too. If USD/ZAR trades outside our 17.60-22.00 range at any point during the 3-month investment, you won’t get a return, but you will get your original USD 10,000,000 deposit back.
RESCDs are no joke, my friend. They’re for big shots who know their way around the currency game. If you’re keen on diving into this world, chat with a money expert. These structured deposits can be tailored to suit various pay-off requirements and risk frameworks. They can be listed, traded over the counter, and are flexible enough to offer enhanced yields where regulatory bodies allow. Please chat with us if you are interested.
I produced this pay-off graph using my best and most current understanding of Microsoft Excel’s charting functionality.
Thank you for reading!