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Financial advisory
RES5Financial Advisory Services✓David invests in a USD-denominated structured deposit that returns his USD 20,000 principal in full at maturity. At purchase USD/SGD was 1.40; at maturity it is 1.30. Ignoring any investment return, what is the effect when he converts the principal back to SGD?
At purchase the SGD outlay was 20,000 x 1.40 = SGD 28,000. At maturity the same USD 20,000 converts to 20,000 x 1.30 = SGD 26,000. Even though the USD principal was fully returned, the USD depreciated against the SGD, producing a loss of SGD 28,000 - SGD 26,000 = SGD 2,000.
Full return of principal in the foreign currency does not protect against an adverse move on conversion; the SGD depreciation of the USD still causes a real loss in home-currency terms.
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