Currency Linked Deposit
|Currency Linked Deposit (“CLD”) is an unlisted structured investment product involving derivatives offered by the Chong Hing Bank Limited, an authorized institution under the Banking Ordinance and is a registered institution under the Securities and Futures Ordinance for carrying out Types 1, 4 and 9 regulated activities. The contents of this document have not been reviewed by the Securities and Futures Commission or any other regulatory authority in Hong Kong.|
What are the key risks?
- Not a time deposit – Currency Linked Deposit is NOT equivalent to, nor should it be treated as a substitute for, time deposit. It is NOT a protected deposit and is NOT protected by the Deposit Protection Scheme of Hong Kong.
- Derivatives risk – Currency Linked Deposit is embedded with a foreign exchange put option sold by you as the investor. Option transactions involve risks, especially when selling an option. Although the premium received from selling an option is fixed, you may sustain a loss well in excess of such premium amount, and your loss could be substantial.
- Limited potential gain – The maximum potential gain is limited to contract interest amount.
- Maximum potential loss – Currency Linked Deposit is not principal protected: you could lose all of your deposit amount and the contract interest amount in extraordinary circumstances where the Linked Currency becomes worthless.
- Not the same as buying the Linked Currency – Investing in Currency Linked Deposit is not the same as buying the Linked Currency directly. If you buy the Linked Currency with Deposit Currency and deposit for the same tenor as a Currency Linked Deposit, you will receive the deposit interest but expose to an exchange gain or loss on the Maturity Date depending on the exchange rate movement of the Linked Currency against the Deposit Currency during the deposit period. If you invest in Currency Linked Deposit, the Bank will compare the Strike Rate with the Fixing Rate on the Fixing Date. If the Linked Currency has appreciated against the Deposit Currency or the Fixing Rate is equal to the Strike Rate, you will receive the Principal and the contract interest amount in Deposit Currency but NOT the Linked Currency. Your return on investing in Currency Linked Deposit is limited to contract interest amount. If the Linked Currency has depreciated against the Deposit Currency, you will receive the Principal and the contract interest amount in Linked Currency, being converted from the Deposit Currency at the Strike Rate. Your return on this investment (be it positive or negative) will be similar to having bought the Linked Currency with Deposit Currency at the Strike Rate at start plus the contract interest amount.
- Market risk – The return of Currency Linked Deposit is linked to the exchange rates of the Deposit Currency against the Linked Currency. Movements in exchange rates can be unpredictable, sudden and drastic, and affected by, among others, complex political and economic factors. The currencies of emerging countries may be volatile when measured against other currencies. Any such exchange rate movement may adversely affect your potential gain or loss under a Currency Linked Deposit.
- Liquidity risk – Currency Linked Deposit is designed to be held till maturity. You do not have a right to request for early termination of this product or request the Bank to close your position before maturity. You shall not assign, mortgage, transfer, dispose of, charge, pledge or otherwise encumber any of your title or interest of and in the Currency Linked Deposit other than to the Bank to secure the liabilities of you or any other person in favour of the Bank as the Bank may agree at its sole discretion from time to time.
- Credit risk of the Bank – Currency Linked Deposit is not secured by any collateral. When you invest in this product, you will be relying on the Bank’s creditworthiness. If the Bank becomes insolvent or defaults on its obligations under this product, you can only claim as an unsecured creditor of the Bank. In the worst case, you could suffer a total loss of your deposit amount and contract interest amount.
- Currency risk – If the Deposit Currency and/or Linked Currency is not in your home currency, and you choose to convert it back to your home currency upon maturity, you may make a gain or loss due to exchange rate fluctuations.
- Risks of early termination by the Bank – The Bank has the right (but not the obligation) to terminate this product early for compliance with the legal and/or regulatory requirements or as the Bank may deem as prudent. In case this product is early terminated by the Bank, you will have to bear the relevant costs of unwinding the put option sold previously. Such costs may be as substantially high as your total deposit amount.
- Adjustment risk – Upon the occurrence of certain events (such as revaluation of an underlying currency, substitution of an underlying currency by another currency or the imposition of foreign exchange control affecting the Deposit Currency/ Linked Currency), the Bank may adjust the terms of the Currency Linked Deposit to account for the effect of such event (such as payment postponement or substituting the original deliverable currency by another currency selected by the Bank). The adjustment as determined by the Bank may have negative impact on your investment under the Currency Linked Deposit.
- Risks relating to Renminbi – If the Deposit Currency or Linked Currency of a Currency Linked Deposit is CNH*, the value of CNH against other foreign currencies (including Hong Kong Dollars) will fluctuate and will be affected by, amongst other things, the control directives, policy and/or measures from the Government of the People’s Republic of China, its legal or regulatory institutes/bodies (‘the PRC government’) on Renminbi from time to time. For example, the PRC government regulates conversion between onshore Renminbi (‘CNY’) and foreign currencies (including Hong Kong Dollars). This would affect the value of CNH because both CNY and CNH are Renminbi but traded in different and separate markets. Renminbi is currently not freely convertible. There is no assurance that disruption in the transferability, convertibility or liquidity of Renminbi will not occur.
As CNY and CNH markets operate independently where the flow between them is highly restricted, CNY and CNH are currently traded at different exchange rates and their movements may not be in the same direction or scale. CNH may be trading at a premium or discount to CNY and there may be significant bid and offer spreads.
- Concentration risk – You should avoid over concentration in investing in a type of investment product and/or particular issuer or counterparty.
- No Post-sale cooling-off period – Post-sale cooling-off period does not apply to Currency Linked Deposit.
- Not exhaustive list – The risks stated above are not and are not intended to be exhaustive in referring to all the risks involved. You are advised to seek independent professional advice as appropriate.
*CNH is the currency code for offshore Renminbi or Chinese Yuan. Renminbi or Chinese Yuan is the legal tender of the People’s Republic of China. In determining the relevant exchange rate under the Currency Linked Deposit which involves Renminbi, you should note that the relevant offshore Renminbi exchange rate but NOT onshore Renminbi exchange rate will be applied.
Advice to Customer
Customer must carefully consider whether Currency Linked Deposit (“CLD”) is suitable for his/her investment in light of his/her own financial position, investment objectives and the risks he/she agrees to bear before investing in CLD. The Customer is advised to seek independent financial and professional advice.
What is Currency Linked Deposit?
Currency Linked Deposit is a time deposit linked with a currency option. In addition to the ordinary time deposit interest rate, it gives investor an extra interest rate derived from the option premium obtained from the selling of a currency option.
Characteristics of CLD
Deposit Tenor: Flexible, normally range from 1 week to 1 month. CLD with bigger-sized principal (subject to change from time to time) may have deposit period up to 6 months. Invested amount cannot be withdrawn (wholly or partially) before the maturity date.
Choices for Deposit Currency/ Linked Currency: You may select among the major currencies as agreed by the Bank, including HKD, USD, EUR, AUD, NZD, GBP, CAD, JPY, CHF and CNH, to pair up for one CLD.
Deposit Amount: Deposit amount can be as low as HKD80,000 or its equivalent in the Deposit Currency.
Strike Rate: Investor may choose the Strike Rate and the Bank will provide the relevant Contract Interest Rate to him/her for reference.
Return: The final return of CLD depends on the relevant exchange rate prevailing at the fixing time on the fixing date. The fluctuation of foreign exchange rate before the fixing time will not affect the final return.
Fees and Charges: No fees or charges will be paid for investing in a CLD. All fees, charges, operational, administrative and hedging costs incurred by the Bank are already inherently contained and included in the calculation of contract interest rate of a CLD.
Role of Chong Hing Bank: Chong Hing Bank will act as principal in all CLD transactions.
Not a Protected Deposit: CLD is not a protected deposit and is not protected by the Deposit Protection Scheme in Hong Kong.
No Post-sale cooling-off period: Post-sale cooling-off period does not apply to CLD.
The Bank reserves the absolute right to change without prior notice for the available choices regarding Deposit Currency/Linked Currency, Tenor, and Minimum Deposit.
CLD is suitable to investors who:
- believe that the “Linked Currency” will appreciate against the “Deposit Currency” or the Fixing Rate is equal to the Strike Rate when comparing the Fixing Rate (the exchange rate of the currency pair consisting of the Deposit Currency and the Linked Currency at the Fixing Time on the Fixing Date) with the Strike Rate;
- are willing to hold either the Deposit Currency or the Linked Currency at maturity;
- have sufficient net worth to assume the risks and bear the potential losses of investing in CLD;
- have knowledge and experience in investing in currency linked products;
- are prepared to hold the Currency Linked Deposit until maturity;
- are willing to accept the risks stated in “What are the key risks?” section.
How to operate?
Choose a currency as “Deposit Currency”
Choose another currency as “Linked Currency”
Select the Deposit Tenor
Determine and Confirm with the Bank the “Strike Rate” and the “Contract Interest Rate”
At 2:00pm or about 2:00pm Hong Kong time (as the Bank may reasonably determine with regards to prevailing foreign exchange market conditions) on the Fixing Date, the Bank will compare the relevant market spot rate (“Fixing Rate”) with the “Strike Rate”:
Scenario 1: if (1) the Linked Currency has appreciated against the Deposit Currency or (2) the Fixing Rate is equal to the Strike Rate, customer as investor will receive the Principal and the contract interest amount in Deposit Currency on the Maturity Date.
Scenario 2: if the Linked Currency has depreciated against the Deposit Currency, customer as investor will receive the Principal and the contract interest amount in Linked Currency, being converted from the Deposit Currency at the Strike Rate, on the Maturity Date.
All figures below are hypothetical and are for illustration purposes as reference only. The illustrative example does not constitute any exhibit or guarantee on prospective gain/loss by the Bank. It does not reflect a complete analysis of all possible potential return or loss scenarios. You should not rely on the illustrative example when making an investment decision.
Except for GBP and HKD in which cases “365 days a year” will be used as Day Count for interest calculation, “360 days a year” will be used as Day Count for interest calculation for other currencies which can be selected as Deposit Currency for Currency Linked Deposit.
Currency Linked Currency: NZD
Deposit Date: 20-Apr-20XX
Fixing Date: 27-Apr-20XX
Maturity Date/Settlement Date: 27-Apr-20XX
Tenor: 7 days/1 week
Spot Rate: NZD/HKD=6.1810
Strike Rate: NZD/HKD=6.1710
Contract Interest Rate: 14.58%
Contract Interest Amount: HKD500,000 X 14.58% X 7/365 = HKD1,398.08
Contract Interest Rate (Coupon Rate) is an annualized rate which is not the Actual Coupon Rate. The Actual Coupon Rate for the Tenor of the Currency Linked Deposit is 0.28% of the Principal (calculated as 14.58%X7/365), as shown up to 2 decimal places. The annualized rate is based on the assumption that the Currency Linked Deposit can be rolled over under the same terms for a 365-day period.
On the Fixing Date, the Bank will compare the Strike Rate with the Fixing Rate.
Scenario 1: Best case scenario
Best case scenario occurs when (1) the Linked Currency has appreciated against the Deposit Currency or (2) the Fixing Rate is equal to the Strike Rate.
In the illustrative example, if the Fixing Rate is greater than or equal to 6.1710, best case scenario results. You will receive the Principal plus contract interest amount (HKD501,398.08) on the Maturity Date and the contract interest amount of HKD1,398.08 is the maximum return of this Currency Linked Deposit.
Scenario 2: Middle-of-the road/ gain scenario
In the illustrative example, if the Fixing Rate is smaller than 6.1710, you will receive the Principal plus contract interest amount on the Maturity Date in NZD calculated as follows.
HKD501,398.08/6.1710 = NZD81,250.70
Your investment will breakeven as long as the value of proceeds received by you is equal to the Principal Amount.
Breakeven rate = HKD500,000/NZD81,250.70 = 6.1538 (to 4 decimal places)
This means that even the Fixing Rate is smaller than the Strike Rate of 6.1710 but still greater than the breakeven rate of 6.1538, your investment in Currency Linked Deposit can still make a profit. However, if the Fixing Rate is smaller than the breakeven rate, your investment will make a loss.
Scenario 3: Worst case scenario
Worst case scenario occurs when the Linked Currency becomes worthless (that is, the Fixing Rate is 0). In this case, you will lose all Principal and interest of the investment.
Scenario 4: The Bank becomes insolvent or defaults on its obligations
Assuming that the Bank becomes insolvent during the tenor of this product or defaults on its obligations under this product, you can only claim as its unsecured creditor. You may get nothing back and suffer a total loss of your deposit amount and contract interest amount.
Currency Linked Deposit Illustrative Example
|Investment Product||contract interest amount Receivable on the Maturity Date||Scenarios on the Fixing Date||Fixing Rate (Exchange Rate on the Fixing Date)||Principal plus contract interest amount on the Maturity Date||Net Gain/(Loss)||Net Gain/Loss (%p.a.)|
Contract Interest Rate: 14.58%
Strike Rate: 6.1710
|Scenario 1: NZD has not depreciated against HKD||6.1750 (Higher than Strike Rate)||HK$500,000(Principal)+ HK$1,398.08(Interest)=HK$501,398.08||HK$1,398.08||+14.58%|
|Scenario 2a: NZD has depreciated against HKD||6.1630(Lower than Strike Rate)||[HK$500,000(Principal)+ HK$1,398.08(Interest)]÷6.1710(Strike Rate)=NZD81,250.70 If converted to Deposit Currency using the market exchange rate of 6.1630 on the Maturity Date, principal plus interest will become NZD81,250.70×6.1630=HK$500,748.06||HK$748.06||+7.80%|
|Scenario 2b: NZD has depreciated against HKD||6.1300(Lower than Strike Rate)||[HK$500,000(Principal)+ HK$1,398.08(Interest)]÷6.1710(Strike Rate)=NZD81,250.70 If converted to Deposit Currency using the market exchange rate of 6.1300 on the Maturity Date, principal plus interest will become NZD81,250.70×6.1300=HK$498,066.79||(HK$1,933.21)||-20.16%|
|Scenario 3: NZD becomes worthless||0||[HK$500,000(Principal)+ HK$1,398.08(Interest)]÷6.1710(Strike Rate)=NZD81,250.70 If converted to Deposit Currency using the market exchange rate of 0.00 on the Maturity Date, principal plus interest will become NZD81,250.70×0=HK$0||(HK$500,000.00)||-100%|
|Scenario 4: The Bank defaults||HK$500,000(Principal)+ HK$1,398.08(Interest) =HK$501,398.08||(HK$500,000.00)||-100%|
HKD Time Deposit (for comparison basis only)
|Deposit Interest Rate||0.02%p.a.*|
|Deposit Tenor||7 days|
*0.02% is sourced from the Bank’s 7 days HKD time deposit as on 26th June 2014. Up-to-date time deposit rates will be made available to investor upon enquiry.
Offering documents for this product
The following documents for this product (“Offering Documents”) contain detailed information about the Bank and the terms and conditions of this product. You should read and understand all of the Offering Documents before deciding whether to invest in this product:
- this Principal Brochure;
- the Bank’s Currency Linked Deposit Important Facts Statement; and
- the Bank’s Currency Linked Deposits Terms and Conditions, all as amended and/or supplemented at the Bank’s sole discretion which may be in force from time to time.
Investing in Currency Linked Deposit needs opening an Investment Account and the customer will also be subject to the following additional documents:
- the Bank’s Investment Account General Terms and Conditions;
- the Bank’s Account Rules; and
- the Notice to Customers and other Persons relating to the Personal Data (Privacy) Ordinance and data policies of the Bank.
In the event and to the extent of any inconsistency among the relevant provisions of:
- the Offering Documents and the above additional documents, those of the former shall prevail; and
- the Bank’s Currency Linked Deposit Important Facts Statement and other Offering Documents, the terms of the former shall prevail whereas those of the Principal Brochure shall prevail over those of the Currency Linked Deposits Terms and Conditions for any inconsistency between them.
The Bank is listed on The Stock Exchange of Hong Kong Limited and is regulated by the Hong Kong Monetary Authority. You may access to the Bank’s latest annual report, interim results and its other information by visiting www.chbank.com
If you are interested in CLD or want to have more information, please contact the Head Office or any branch of Chong Hing Bank or call our Customer Services Hotline at 3768 6888.
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Chong Hing Bank has taken reasonable procedures to ensure the accuracy of the information at the time of publishing this document. This document is for information only solely for reference purpose and does not constitute any offer, solicitation to invest, advice or recommendation.