Foreign Currency Certificates of Deposit (CDs)
Article Submitted By: BestCashCow
Financial products like foreign currency Certificates of Deposit can diversify your portfolio with foreign currency, but bear certain risks.
Financial products like foreign currency Certificates of Deposit can diversify your portfolio with foreign currency, but bear certain risks. EverBank, an established online bank, has taken the lead in developing these foreign currency products and they now offer FDIC Insured certificates of deposit that can be purchased in US dollars and track foreign currencies ranging from the Euro, to the Brazilian Real and the Indian Rupee. EverBank has also offered baskets of foreign currency CDs, where you can structure your CD to be divided among a handful of currencies, and a Dollar Bull CD, that might increase in value faster as the dollar rises against select foreign currencies. FDIC insurance for these products protects investors from a bank failure; it does not protect against currency fluctuations and the resulting loss of value in dollar terms.
How foreign currency CDs work:
1. You deposit your money.
2. They convert your funds into the currency of your choice.
3. They deposit your funds into an FDIC insured Certificate of Deposit.
4. At maturity the funds (the principal, interest, and currency changes) are converted back into dollars and can be withdrawn.
5. Or, the funds can be rolled over into another term CD.
How You Can Benefit from Foreign Currency CDs
If your goal is to track the performance of a certain currency and believe that currency will appreciate, but may be concerned about the risks to the banking system in that country, these products may make sense as they can extend US FDIC insurance where it may not otherwise be available.
If your goal is to outperform the US rate of return through getting a rate of return above that which may be available through a standard US-based CD, you may do better to look at a structured product issued by a US investment bank. Some US investment banks, for example, now offer collared products which will yield 10% if the Brazilian real appreciates against the dollar, but only 1% if it depreciates.