What Is a Foreign Currency Fixed Deposit (FCFD)?
A Foreign Currency Fixed Deposit (FCFD) is a fixed investment instrument in which a specific sum of money that is poised to earn interest is deposited into a bank.
Although fixed deposits have virtually no risk, foreign currency fixed deposits introduce an element of exchange rate risk because investors must exchange their currency into the target currency and then convert it back again once the term is over.
Key Takeaways
- A foreign currency fixed deposit is a fixed-income investment for keeping foreign currency.
- The money deposited in an FCFD earns interest but comes with some currency exchange risk.
- Money in an FCFD account can’t be withdrawn until the fixed term is up.
- Investors use FCFD accounts to diversify or hedge against foreign currency movements.
Understanding a Foreign Currency Fixed Deposit (FCFD)
A foreign currency fixed deposit is a type of time deposit issued by banks to investors who would like to keep foreign currency for future use or hedge against foreign currency fluctuation. The money deposited in the FCFD account cannot be withdrawn until the agreed fixed term has expired.
When foreign currency fixed deposits are larger and longer in duration, they receive much higher interest rates. An FCFD can be a very useful and safe way to invest your money. However, depositors must make sure that they do not need that money for the entire duration of the term. If an investor withdraws the funds prior to maturity, an early withdrawal penalty would apply, which is often steep and set at the discretion of the bank.
The early redemption of a foreign currency fixed deposit will very likely result in the partial loss of the principal sum due to the combined effects of the redemption charges and bid-ask spread charges.
Benefits of a Foreign Currency Fixed Deposit
There are a number of reasons why an FCFD investment appeals to certain investors. Investors who want some diversification in their portfolios may opt for FCFDs in another currency. Companies looking to hedge against foreign exchange movements may use the FCFD as a hedging tool. For such companies, an FCFD is used to facilitate cross-currency swaps. Investors who want exposure to a target currency because they invest abroad, have children studying in a given country, or conduct business in another country may invest in FCFDs.
An FCFD can be invested in two ways—opening a local account that offers deposits in the foreign currency that the investor would like to gain exposure to or opening an account in the foreign country itself. Interest rates, minimum deposits, tenure periods, and available currencies vary from bank to bank.
Example of a Foreign Currency Fixed Deposit
For example, A Canadian investor who has CAD dollars but wants to hold U.S. dollars can deposit USD into a US dollar-denominated FCFD paying a higher interest rate than a local Canadian savings account. To do this, the investor will have to purchase US dollars from the issuing bank using his Canadian dollars. After the US dollars are purchased, they are deposited into the FCFD.
USD/CAD is quoted as 1.29 from an FCFD issuing bank. An investor that wants to deposit $100,000 will buy USD at the rate of 1.29 from the bank by selling CAD 129,000. The $100,000 is deposited in the FCFD account for one year and earns an annual interest of 1.5%. After the tenure ends, the USD is sold for CAD at the prevailing foreign exchange rate offered by the issuing bank.
Investors who do not expect foreign exchange rates to move against them will typically use an FCFD. However, all FCFD investors face foreign exchange risk given that if there is an adverse movement in the exchange rate, the transaction costs and exchange rate difference might negate any excess interest returns or even put the investor in losses.
Following our example above, at the end of the term, the investor earns 1.5% x $100,000 = $1,500. However, the bank is only willing to purchase USD at a rate of 1.21. This means that the investor will receive Canadian dollars worth $101,500 x 1.21 = CAD 122,815. As you can tell, this amount is below the investor’s original investment amount of CAD 129,000.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.
FAQs
Example of a Foreign Currency Fixed Deposit
What is fixed deposit with an example? ›
A fixed deposit is a type of deposit in which a sum of money is locked for a fixed period of time. However, the tenure for the fixed deposit is decided by the person who invests his funds. This tenure could be anywhere from a few days to several years.
What is the benefit of a foreign currency account? ›
Saves money on foreign exchange fees
For a business that receives regular payments in different currencies, these costs can snowball. One of the biggest advantages of a foreign currency account is that because it can hold multiple currencies this conversion becomes redundant.
What are the benefits of a fixed deposit? ›
Fixed Rate of Interest: One of the primary benefits of investing in fixed deposits is that they offer a fixed rate of interest, which is higher than regular savings accounts. The interest rate on fixed deposits is determined at the time of investment, and it remains the same throughout the term of the deposit.
What are the benefits of investing in foreign currency? ›
Investing in currency can offer several advantages:
- Convenience and accessibility: Stock market exchanges operate during set hours. ...
- Diversification: Diversifying your portfolio can help manage risk. ...
- Lower costs: Unlike trading stocks, there may be fewer commissions associated with trading foreign currencies.
Considering that a fixed deposit is a one-time investment scheme, depositing money on a monthly basis is not an option. Instead, with fixed deposits, individuals have an option to choose their frequency of periodic interest pay-outs – monthly, quarterly, half-yearly, and annually.
How to withdraw money from a fixed deposit after maturity? ›
Step 1: Visit the branch of the bank where you have the fixed deposit account. Step 2: Submit your fixed deposit certificate to confirm your intention to withdraw funds upon maturity. Step 3: Fill out a withdrawal form (FD maturity application) with the necessary details and sign it.
What are the benefits of foreign currency fixed deposit? ›
Benefits & Privileges
Stay protected from future foreign currency fluctuations while keeping foreign currency for your future use. You can make your deposits and withdrawals through: Foreign telegraphic transfers. Demand drafts.
Can you deposit foreign currency into your bank account? ›
Some banks may let you exchange unspent foreign currency you bring back to the U.S., but you generally won't be able to deposit foreign money into your checking or savings account. Instead, you'll have to exchange foreign currency for dollars before making a deposit.
Should I open a Foreign Currency Account? ›
Avoid foreign exchange fees
A foreign currency account will allow you to trade in that particular currency without incurring extra costs. For example, suppose you plan to open a US dollar account. You can receive or send payments to the United States without incurring any foreign exchange fees.
Steps to Invest in Fixed Deposit
- Step 1 – Check and Compare FD Rates. You must note that the rate of interest offered on FDs tends to vary from one financial institution to another. ...
- Step 2 – Pick Suitable Deposit Tenure. ...
- Step 3 – Choose a Frequency of Interest Pay-outs. ...
- Step 4 – Select a Mode of Deposit.
Diversifying your investment portfolio is always a good idea, and placing funds in a low-risk investment option has few downsides in the long term. With the certainty of guaranteed returns and fixed interest rates, SGD fixed deposits are a low-risk and reliable investment option for investors seeking stability.
Is my money safe in fixed deposit? ›
If you have invested your money with a bank, it is more than likely safe. The Reserve Bank of India (RBI) has made deposit insurance compulsory for all banks. Your investment in a bank is insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, which covers your deposits up to Rs.
What are the benefits of saving in foreign currency? ›
Benefits of Having a Foreign Currency Savings
- Easy Access to Foreign Currency Savings.
- Competitive Rates.
- Preparation for Overseas Education.
- To Diversify Investment Assets diversifikasi aset investasi.
Foreign exchange markets serve an important function in society and the global economy. They allow for currency conversions, facilitating global trade (across borders), which can include investments, the exchange of goods and services, and financial transactions.
Why are people buying foreign currency? ›
You can allocate your risk across the currencies of several countries, allowing you to profit from changing global macroeconomic conditions. Currencies are akin to commodities and stocks because they offer the potential for capital appreciation. If the value of your currencies rises against the dollar, you will profit.
How does fix deposit work? ›
So, what exactly is a Fixed Deposit? In a Fixed Deposit, you put a lump sum in your bank for a fixed tenure at an agreed rate of interest. At the end of the tenure, you receive the amount you have invested plus compound interest. FDs are also called term deposits.
Is a fixed deposit a good investment? ›
Safety and Guaranteed Returns: Fixed deposits are one of the safest investment options. They offer guaranteed returns, making them a reliable choice for risk-averse investors. The principal amount remains secure, and you receive the predetermined interest on maturity.
Does FD give monthly returns? ›
However, you must know that the rate of interest on monthly interest FDs is higher than what you will earn by letting your money sit in current and savings account. Some banks offer monthly interest FDs for tenures as long as 10 years, which is a substantial period of time to receive an interest income.
What is an example of a fixed interest? ›
Fixed interest rates remain constant throughout the lifetime of the debt. This means they aren't susceptible to changes in the economy. So if you have a mortgage with a fixed rate of 6%, it will never change until you pay off the debt.
