If you ever approached by bankers to invest in this as they may offer you easily 9% p.a. for 1 to 2 weeks tenure, please make sure you perfectly understand what is it for before entering into a contract.
- You deposit EUR300,000 into DCI account.
- Bank promised you enhanced return of 9.0%p.a.
- Current spot rate for EUR/RM is 4.3210
- Strike rate is 4.3650
- Breakeven is 4.3690
- Tenure 7 days
If on maturity date, EUR/RM goes to 4.3650 and above, you strike and gets RM based on 4.3690 (breakeven rate) Else, you will get EUR of EUR300,000 + 7 days interest on the enhanced return.
Well, sound simple but lets look at the risk.
If EUR/RM goes to 4.5000, you will still get your RM based on 4.3690 and therefore (your losses is 4.5000-4.369 x EUR300,000 = RM39,300).
If you gain, you are looking at EUR300,000 x 9.00% x 7 days = EUR517.80 (approx RM2,250 assumed EUR/RM at 4.350)
Gain, limited and capped.
Loss, unlimited and uncapped.
Well, under what circumstance you should use DCI?
Check with me if you are interested.