A fixed deposit with variable terms for the currency of payment. Deposits are made in one currency, but withdrawals at maturity occur either in the currency of the initial deposit or in another agreed upon currency. This is a deposit that creates a foreign exchange rate risk for the investor. Similar to a currency swap, you can be rewarded or punished for the risk taken.
Underlying a DCD, the customer sells an FX option to the bank, which gives the bank the right to exercise the option (in which case the customer receives its deposit back in a different currency). The bank pays the customer the option premium in the form of an increased interest rate on the deposit. The customer is thereby unaware of the underlying FX option.
Customer is Bill Gates.
So he enters into a $100,000 1-month GBP/USD DCD with a conversion rate of 1.96.
The FX Options Desk of the bank is best able to price and manage the risk for these sorts of products, and also benefits from the extra liquidity (more options!) in their book, making it easier for them to cancel out the risk of different buy/sell positions.
The Sales person is eager to provide the customer with all the investment opportunities possible and generally earns higher fees on more complicated / new products.
The DCD is actually composed of a normal deposit and an option.
Normally in the options market the seller of an option is paid before the premium value date or "spot date" (for more information see FX Date Conventions) however in the case of the DCD the client is paid at the end of the deposit period. For this reason some banks offer their clients a product commonly called DCD+ which includes an interest element to account for this.
Adding this to the deposit redemption-amount means that the amount of currency that will need converting if the option strike is passed at expiry has now increased. So the option face amount needs to be altered to take the extra interest into account. This affects the premium again, and so on.
To avoid having to compute this to infinity one can use a Geometric series with
where yield is the forward value (or FV) of the option premium giving a multiplier to change a DCD's option premium to a DCD+ of:
THE BANKS should be forced to pay for keeping money on deposit with the ECB instead of being paid to save cash.
Jun 10, 2009; Call for forcing banks to pay when depositing cash with ECB THE BANKS should be forced to pay for keeping money on deposit with...