Foreign Currency Fixed Deposit (FCFD) definition for investors
A fixed deposit (FD) account is a type of bank account where investors can earn interest by depositing money over a period of time. For a long time, they were the preferred investment option, offered in the form of various long-term deposits by various banks or financial institutions. The periods can range from 7 days to 20 years. But here we discuss how Foreign Currency Fixed Deposit (FCFD) accounts different.
A Foreign Currency Fixed Deposit (FCFD) is a fixed investment account that allows investors to hold and invest foreign currency in order to receive interest. This type of account is known as a foreign currency non-resident account (FCNR), and the money deposited in these accounts comes with interest, but carries some currency risk. Global investors participating in international trade transactions can use these accounts to diversify their assets against currency movements. In short, a Foreign Currency Non-resident account allows you to increase your foreign currency holdings at a fixed rate while keeping your funds safe.
What is Foreign Currency Fixed Deposit (FCFD)?
A foreign currency fixed deposit account (FCFD) is a fixed investment tool that allows investors to make fixed deposits in a bank in order to earn interest. While fixed deposits carry little or no risk, foreign currency fixed deposits face some kind of exchange rate risk since investors must exchange their currency for a target currency and then return it to their desired currency at maturity. Foreign currency fixed deposits, therefore, are interest rate investments in foreign currency holdings. You cannot withdraw from your FCFD account before the end of the specified period. Investors use FCFD accounts to diversify or hedge against exchange rate fluctuations.
Foreign Currency Fixed Deposit (FCFD) Explained
A foreign currency term deposit is provided by a bank to investors who want to save foreign currency for future use or hedge exchange rate fluctuations. Amounts deposited in the FCFD account cannot be withdrawn before the expiry of the agreed fixed period. If your foreign currency deposits are larger and the maturity time is longer, you will receive a much higher interest rate. FCFDs can be a valuable and safe way to invest your money. However, the depositor must ensure that no funds are required for that period. If investors withdraw money before maturity, often high and early withdrawal penalties set by banks apply. Early redemption of term deposits in foreign currencies is likely to result in partial losses due to the cumulative effect of redemption fees and bid/spread fees.
Advantages of foreign currency forward deposits
There are several reasons why FCFD investing is popular with some investors. Investors looking to diversify their portfolio can choose FCFDs in other currencies. Companies looking to hedge against exchange rate fluctuations can use FCFDs as a hedging tool. For these companies, FCFDs are used to facilitate currency swaps. Investors looking to access their target funds because they are investing abroad, studying in a particular country, or doing business in another country can invest in FCFDs.
FCFDs can be invested in two ways: Opening a local account offering foreign currency deposits that investors wish to access, or opening an account in a foreign country. Interest rates, minimum deposits, holding periods and available funds vary from bank to bank.
See our other articles about forex trading: