Dual Currency Investment
intermediateforexyield enhancementconversion
Enhanced yield on forex deposits by selling a put option on the alternative currency. Higher returns in exchange for currency conversion risk.
Parameters
1.37
0.53
1.34
0.53
10%
1%30%
90days
7days360days
Payoff at Expiry
1.37
1.0961.5755
Current Outcome
If GBP/USD settles at 1.37:
You receive $102,500 in base currency
Yield Earned
$2,500
Conversion
NOForex P&L
+$0
Amount
102500.00
Scenario Analysis
Understanding DCI
How DCI Works
The investor places a deposit and the bank uses the enhanced interest differential to sell a put option on the alternative currency. The investor earns a higher yield in exchange for bearing currency conversion risk.
RATE ABOVE STRIKE
Investor receives principal + enhanced interest in base currency (USD). No conversion.
RATE BELOW STRIKE
Investor's principal + interest converted at the strike rate to alternative currency (GBP). Potential forex loss.
Textbook Example (Section 7.3)
GBP/USD Spot: 1.37 | Strike: 1.34 | Enhanced yield: 10% p.a. | MM rate: 1.75%
If GBP/USD > 1.34: Receive investment + 10% interest in USD
If GBP/USD < 1.34: Converted at strike rate of 1.34 to GBP — potential forex loss
DCI Formulas
DCI Variants
Knock-Out DCI ("Disappearing")
If barrier is touched, DCI reverts to a normal deposit. Investor gets principal + normal interest.
Knock-In DCI ("Appearing")
DCI only activates if barrier is touched. Otherwise, investor gets normal deposit rate.