What is DCD?
It is a fully secured options transaction. The customer’s deposit is secured as collateral for the options transaction.
Under the options transaction within a DCD, the bank pays the customer a premium against the transfer of the right to buy or sell a foreign currency on a specified date at a specified rate.
The customer sets the contractual price (the strike price) with the bank based on the market price (spot price) for a specific term and commits to convert his/her currency to the other currency – notwithstanding the exchange rate – at the maturity.
Thus, the customer sells an option and in return gets an option premium from the bank with the same maturity date in addition to the interest earned on his/her deposit.
The difference between the contractual price and the market price at maturity directly impacts the premium paid to the customer.
The amount used in a DCD transaction is blocked in the deposit account for the duration of the term.
DCD Return = Deposit Interest + Options Premium
Benefits
Enables high returns by accepting the currency risk.
Important Reminder
The principal may loose value due to the inherent currency risk (any movement in the exchange rates contrary to the customer’s expectations may result in a loss on the principal).
Preterm payments are precluded.
Tax Considerations
15% withholding tax over the interest earned on the deposit, and 10 % over the options premium apply.
Target Customer Groups
Customers who trade in the foreign exchange, are acquainted with the product, and will to accept the inherent currency risk.
Customers who will to carry a certain amount of risk in their investments.
Contact our branch offices for transaction lower limits.
TRANSACTION EXAMPLES
EXAMPLE ( 1 ) FX Investor (over the gross rates)
John Smith, considering investing his USD 500,000, ->estimates that the USD exchange rate, TL 1.5130 on February 12, 2010, would be TL 1.5550 or lower on March 16, 2010 (32-day term). Mr. Smith
accepts to converting his investment to TL over the 1.5550 exchange rate on the following conditions, if the USD/TL exchange rate becomes TL 1.5550 or higher at the maturity date.
The bank pays 7.20% (gross premium) for the contractual option with 2.30% gross interest for the deposit amount engaged for the duration of the option (32-day term), for a total gain from DCD of 9.50% (gross).
Term: 32 days
Options Premium: 7.20% gross annual
Gross annual USD deposit rate blocked during the term: 9.10% gross annual
DCD gain: 12.50% gross annual.
(a) If the expectation actualizes
If the spot (market) price
at maturity <= 1.4800 (e.g., 1.4600),
(TL 1,000,000TL * 32 * 12.50)/36500 =
TL 10,958 (gross) (deposit interest plus options premium)
+ 1,000,000 TL
= 1,010,958 TL (gross)
(b) If the expectation fails
If the spot (market) price at maturity <= 1.4800 (e.g., 1.4600),
(TL 1,000,000 *32*12.50 /36500)= TL 10,958 (gross) (deposit interest plus options premium)
+ 1,000,000 = TL 1,010,958
TL 1,010,958 /1.48 =
USD 683,080 (gross) (the customer sells TL 1,010,958 for USD 683,080)
** USD 683,080*TL 1.4600TL = TL 997,296 (the customer shall have sustained a loss on his principal as the conversion to the USD at DCD maturity will be over the lower contractual price (i.e. TL 997,296-TL 1,000,000 = TL -2,703.)
In both transactions:
The calculations have been made over the gross interest rates, excluding the tax withholding, which, if included in the calculations, may alter the outcome in terms of gains/losses.
The narrower the margin between the spot price and the contractual price (strike price), the higher the interest rate (increased options premium).
The narrower the margin between the spot price and the contractual price (strike price) is, the higher the odds that the expectation can fail.
The customer cannot access his/her funds until maturity.
