Back in 2008, I invested S$400,000 in currency linked investment (CLI). CLI is a short-term yield enhancement structured product based on investor’s view of the exchange rate movement between 2 currencies.
The currency pair was Aussie dollars against Singapore dollars (AUD/SGD). The strike price I had contracted was A$1 = S$1.265. So long that Aussie dollar remains strong and stays above S$1.265, the investment would not be converted to Aussie dollar. At the same time, the investment earns a yield of 4.50% p.a. interest income. This yield was big and enticing. However when the Aussie dollar weakens below S$1.265, conversion to Aussie dollar may mean that you would not be able to get back to Singapore dollar at the original strike price. The negative is that investor gets stuck with Aussie dollar unless you convert back to Singapore dollar at a lower value and lose a big chunk of your investment. Alternatively, the bank relationship manager may try to pair your investment with another currency to beat the market and regain your investment value.
My actual experience with this currency linked investment was bad. From S$400,000, I reduced my exposure to CLI to just S$100,000 in 2013 when the Aussie dollar was below my initial strike price of S$1.265. The Aussie dollar did not recover to S$1.265 against Singapore dollar (AUD/SGD) since 2013. Now the currency pair (AUD/SGD) is S$1.0902.
I took a drastic decision to get out of this type of investment last year and this month by selling out the investment.
For eight years since 2008, my income and capital losses for CLI were as follow:
Interest earned: S$13,184
Capital losses: S$33,488
Overall net loss on investment: $20,304.
Considering the amount of loss in relation to the quantum to start with, it did not look as bad. It could be much worse.
Clearly, this currency linked investment carries risk. I do not think that I can beat the market with this kind of currency volatility, especially when the Aussie dollar against Singapore dollar had declined significantly over the eight years.
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