To a private investor, the term 'investing in ACUs'
would generally refer to the placement of deposits with banks in one or a number
of foreign currencies. One of the main attractions of investing in foreign
currencies vis-a-vis the investor's home currency is to take advantage of
potentially higher interest rates.
There are many foreign currencies that an investor can consider investing in, such as the Australian Dollar, New Zealand Dollar, US Dollar, Pound Sterling and Euro, to name a few of the more popular currencies. Once a decision has been made which currency to invest in, an investor can then purchase the foreign currency at the prevailing exchange rate, simply by writing out a Singapore dollar cheque to the bank the investor wishes to deal with.
Risks Involved
The main risk involved in an ACU investment is that the investor, when placing a deposit in a currency other than the one in which he is based (ie the 'home' currency), creates an exchange rate exposure. This is the risk associated with changes in exchange rates between the ACU investment and the home currency.
The exposure can be both positive and negative, as the
exchange rate differential can move for or against the investor. An investor's
exchange rate forecast (ie whether the currency moving in or out of favour
relative to the home currency) must be taken into consideration, together with
the interest rates that ACU deposits pay.
The interesting point is that the rate of return for ACU is dependent on the foreign exchange risk. For example, even if the investor chooses a foreign currency which has a higher interest rate compared to a local currency deposit, depending on exchange rates fluctuations, the return of the ACU investment could result in possibly higher or lower returns.
Volatility
In view of the volatility of the currency market, it is
advisable for the investor to discuss the options with a bank which has the
latest information on the movement of various foreign currencies prior to making
any investment.
The timing of entry into an ACU deposit is comparable to the timing of an entry into any investment, ie all the risks need to be carefully assessed at the time the investment decision is made and monitored carefully throughout the life of the investment to prevent unforseen surprises.
Hedging Against Currency Risk
There are various mechanisms available for the investor to hedge foreign currency risk. One is to enter into a 'forward cover' with the bank. A forward cover is a contract between the bank and the investor to buy or sell a specified quantity of foreign currency against the investor's home currency at a future date, for example, the maturity date of the deposit. The forward exchange rate will depend on the interest rate differential between the two currencies involved.
If the forward cover is entered into simultaneously with the foreign currency deposit, then, in normal circumstances, this cover will negate any benefit of investing in a higher yielding currency. However, if the cover is entered into during the term of the deposit, the investor could then benefit from the higher interest rate of the foreign currency for the period of the deposit that has expired.
Opening An Account
The procedures for opening an ACU account differ from bank to bank. At National Australia Bank Asia, opening an ACU account is very simple. All customers need to do is to come to the bank with their passport or identity card and sign a simple account opening form and provide the appropriate funds to purchase the foreign currency.
National Australia Bank Asia is part of Australia's largest banking group. It is one of the largest and most successful banking groups in the world with total assets of A$344 billion, with more than 45% of these assets located outside Australia.
The bank operates five branches and four offices in all of Asia's business capitals. In Singapore, the bank offers a range of retail banking and financial services, including multi-currency deposits and overseas property financing.
Call 1800-4336875 for a personal consultation today or fax to (65) 3360067 or e-mail to ufirst@nabasia.com now.
Disclaimer
The above constitutes general information current at the time of publication and
is not intended as specific advice. The Bank is and shall not be held
responsible or liable for any error in, or omission from, such information.
Professional advice should be sought prior to the undertaking of any action by
readers.