Many small and medium sized operators are concerned about the continued deterioration in the value of sterling against the euro, US dollar and other currencies.
In the last ten days, sterling has taken a pummelling and, as I write, is now worth just over 1.08 euros and 1.58 dollars. Corporate interest rates are negligible, although consumers are now starting to benefit from far better rates for long term deposits.
One of the ways operators can achieve better interest rates, as well as benefiting from improved exchange rates, are Dual Currency Deposits – known in the banking fraternity as DCDs.
You place your sterling on deposit (short-term deposits that receive a preferential interest rate) and if sterling is stronger at the time of maturity, you get your deposit returned in euros or dollars with guaranteed interest.
As the tables below show, if you put £100,000 on deposit for two months at a £1/€1.10 rate, at maturity, if the exchange rate is €1.10 or better, you receive your £100,000 deposit back in euros – ie €110,000, plus guaranteed interest at a rate equivalent to 6.52% a year.
If you choose a higher rate, such as £1/€1.12 for four months, and at maturity the exchange rate is €1.12 or higher, you receive €112,000, and guaranteed interest equivalent to 4.1% a year.
In all cases, sterling deposits and interest are guaranteed. All major banks offer these facilities, and they are a way of achieving a better return on your money and higher interest rates. They also have the potential to benefit from more favourable exchange rates than current spot rates.
But there are downsides – if the maturity rate is considerably higher than the agreed DCD rate, you lose out. However, interest rates are better than the average 0.25% obtainable from major banks for short-term deposits.
It is worth looking at DCDs as part of your currency hedging provision. I regularly speak to banks to ascertain where they see the value of sterling – and there seems to be no consensus.
You have to make a decision on what suits your business, and DCDs are another instrument to put into the mix.
Sample interest rates on DCDs
GBP/EUR (Spot 1.0800) | 1.1000 | 1.1100 | 1.1200 |
|---|---|---|---|
| Two months | 6.52% | 4.73% | 3.37% |
| Three months | 6.34% | 5.01% | 3.93% |
| Four months | 6.09% | 5.00% | 4.10% |
| Five months | 5.89% | 4.98% | 4.20% |
| GBP/USD (Spot 1.5840) | 1.6000 | 1.6200 | 1.6400 |
|---|---|---|---|
| Two months | 8.71% | 5.80% | 3.69% |
| Three months | 7.92% | 5.82% | 4.20% |
| Four months | 7.35% | 5.68% | 4.36% |
| Five months | 6.98% | 5.58% | 4.45% |