December 5, 2023

Enhancing returns using tailored FX solutions

Tailored FX solutions can provide stand-alone enhanced income streams or form part of a wider investment strategy. Let's explore the choices

FX tailored solutions

Foreign Exchange (FX) can be a source of income and help improve diversification in an investment portfolio by utilizing tailored FX solutions.

A currency’s value is impacted by a wide range of factors, including geopolitics, economics and market risk sentiment, there is never a shortage of trading opportunities.

By using tailored FX solutions, wholesale investors access more sophisticated tools for generating income by taking measured risk in FX markets.  By taking a view on changes in FX exchange rate over a specified term, investors can earn an income typically higher than a term deposit, without taking on the onus of trading FX.  This is a great way to diversify an investor’s income stream as the rewards received from an exposure to FX is not directly related to the direction of bond or equity markets.

NAB offers two types of tailored FX products.

 

Currency Linked Structured Deposits (CSLD) are for investors who do not want their base currency converted.  They include Range, Bull and Bear deposits.  For instance, with Range deposits, investors need to commit a capital outlay and nominate a currency trading range, i.e., a floor and a ceiling over a specific term. Then at the end of the term, the capital outlay will be returned regardless of the exchange rate in addition to income (where applicable). The income rate, determined at the onset of the investment, will depend on two outcomes. Maximum income will be paid if the currency has traded within the nominated trading range throughout the period, otherwise minimum income will be paid. In other words, investors’ capital is protected, and income earned is subject to currency rate fluctuation.

 

Let’s look at an example:

  • An Investor nominates an AUD/USD trading range between 0.62c to 0.66c for a one-month term. If the currency trades between this range throughout the term, the investor will receive a maximum annualised income rate of 6.2%p.a, otherwise investors would receive a minimum annualised income rate of 0.1%p.a. Initial capital invested will be returned no matter the outcome. 

 

are for investors who can accept currency conversion risk, or who wouldn’t mind having their base currency converted to the alternate currency..  Investors commit a capital outlay in a base currency like AUD and nominate an alternative currency, for example, USD or EUR. Investors also nominate an exchange rate when it converts and specify a term. Based on these specifications, an income rate will be determined and paid at the end of the term. There will be two outcomes for the capital outlay. If the base currency appreciates against the alternative currency and the currency value is above the exchange rate nominated, it will be converted to alternative currency, otherwise it will not be converted.

 

Let’s look at an example:

  • An Investor invests in AUD and nominates USD as an alternative currency with a conversion rate of 0.65c over a three-month term. At the end of the term, the investor will get an 8.5% annualised income regardless of what the spot AUD/USD price is.  If the spot AU/US is below 0.65c, no conversion is required, and if it’s above 0.65c, then investors’ capital outlay will be converted to USD at 0.65c. In this scenario, the investor will incur a capital loss.

 

In addition to being a diversified income source, these tailored FX solutions also offer other benefits. They are considered short-term investments no longer than one year, so investors do not need to tie up funds for a long time to earn an enhanced return. They are also extremely flexible. Investors can nominate a currency pair and calibrate exchange rate/range, to reflect their own view or risk profile. The income returns an investor gets is compensation for taking an exposure to FX market fluctuations. The terms can be adjusted to reduce currency risk exposure, although this will also reduce the return.

FX income solutions work well when FX market volatilities are high. In recent years, inflation, unsynchronized tightening of monetary policy, and uncertainties in global macroeconomics have added dramatic volatility to global currency markets, making returns from tailored FX income solutions very attractive. Investors who are looking to add enhanced and diversified income may consider this opportunity.

If you want to find out more about tailored FX solutions, please speak to a NAB Investment Specialist

 

Important Information

The information contained in this article is gathered from multiple sources believed to be reliable as at November 2023 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. Past performance is not necessarily indicative of future results. No warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither NAB or any of its related entities accept liability to any person for loss or damage arising from the use of this information. ©2023 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.

 

 

 

 

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