tag:blogger.com,1999:blog-6093560390959788459.post545166577566693718..comments2024-03-21T09:29:25.220+00:00Comments on The Financial Crimes: Warning: May contain embedded optionsAlexhttp://www.blogger.com/profile/13775753218753337766noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-6093560390959788459.post-30577369882928029592009-08-26T09:47:45.705+01:002009-08-26T09:47:45.705+01:00"Yet I hope I have have demonstrated above th..."Yet I hope I have have demonstrated above that it is perfectly possible to be a private banker trying as hard as one can to do one's absolute very best for one's client and for them both legitimately to come to the conclusion that a DCD might be an appropriately usefull thing for the client to use"<br /><br />This is a classic case of a bank pushing what it wants to sell, in this case because its options trading desk sees how it can pull a fast one one its customers. Honestly, did you ever hear a customer say, "I would like a one month deposit facility where I get paid off in the worst performing of two currencies over the month"? Really?Alexhttps://www.blogger.com/profile/13775753218753337766noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-4619786587442046932009-08-25T21:08:04.071+01:002009-08-25T21:08:04.071+01:00"I say they are shockingly bad products simpl..."I say they are shockingly bad products simply because they are sold dishonestly as high yield products whereas every swaps dealer knows there is no such thing as a free lunch."<br /><br />There's the rub: a sweeping dismissal by an expert who knows what he's talking about. Yet I hope I have have demonstrated above that it is perfectly possible to be a private banker trying as hard as one can to do one's absolute very best for one's client and for them both legitimately to come to the conclusion that a DCD might be an appropriately usefull thing for the client to use: and yet the experts will still pan the product, so inducing the client to believe his private banker is being duplicitous when in fact he's being quite the opposite. <br /><br />Ho hum that's life I guess....Sir Inglegramhttps://www.blogger.com/profile/17054654821777389211noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-53652020470245771972009-08-25T20:54:31.697+01:002009-08-25T20:54:31.697+01:00I say they are shockingly bad products simply beca...I say they are shockingly bad products simply because they are sold dishonestly as high yield products whereas every swaps dealer knows there is no such thing as a free lunch. The punter is sold on the "high" interest rate without appreciating the risk in the embedded option.Alexhttps://www.blogger.com/profile/13775753218753337766noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-14340724378568798472009-08-25T19:56:22.621+01:002009-08-25T19:56:22.621+01:00I agree that most of what you say is probably corr...I agree that most of what you say is probably correct, but then in the real world most ordinary private clients aren't as interested as we might be in the deepest intricacies of these things; and as soon as you, perhaps correctly, start talking about currency options or forwards (i.e. the dreaded "derivatives" aaaargh!) nine out of ten private clients that I know will be heading for the next county before you've even finished your sentence. So you won't even get the chance to explain at all that there may be a better way.<br /><br />A DCD is a perfectly valid product if used in the right way: my example may be at least one where the client may see the package that it represents as worth it, and, perhaps more importantly, safe or unlikely to go drastically wrong. It also protects them somewhat from later seeing that they might have made a stupid decision because the decision is made for them by the markets, which is important too: animal spirits you see.<br /><br />It may not be perfect but then very few financial products are - look at unit trusts for example - they can go down in value (sometimes alot) and on average everybody loses (not least because of the fee), but no-one realistically says that they are shockingly bad products.Sir Inglegramhttps://www.blogger.com/profile/17054654821777389211noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-23331163818802916252009-08-25T16:34:44.470+01:002009-08-25T16:34:44.470+01:00"not sure exactly when to do it because you d..."not sure exactly when to do it because you don't know when the best time is"<br /><br />Then perhaps no hedge is better. The time to hedge is when you know you are certain to buy. A refinement might be to hedge dynamically according to the likelihood of completing, provided you are willing to bear the possible cost of unwinding the hedge if you don't buy the foreign house.<br /><br />But all that is far removed from the DCD, where you do not have any control over the exercise, so you never know which currency you will end up with - and where on average you should expect to end up worse off than holding the money on deposit in the normal way.<br /><br />There are very few real life profiles that are hedged by the DCD - you would need to otherwise be in a position to profit from the depreciation of the alternate currency to make this work, but even then you would not do as well as you could dealing directly with the markets - which you can do; just ask your bank for details if you want to buy a currency option or forward.Alexhttps://www.blogger.com/profile/13775753218753337766noreply@blogger.comtag:blogger.com,1999:blog-6093560390959788459.post-55744797794392536262009-08-25T15:30:11.670+01:002009-08-25T15:30:11.670+01:00Hmmm. If you want to buy a significant amount of ...Hmmm. If you want to buy a significant amount of a new currency (for example to buy a holiday home in a foreign country) and are not sure exactly when to do it because you don't know when the best time is, and you are happy to wait a bit because you're not in a hurry to do so, then a DCD is a good way of having the decision made for you: you get a higher interest on your home currency deposit while you wait, and if you get switched into the new currency well hey you wanted that anyway so you don't mind.<br /><br />Oh, and you might be a private client so you're not big enough to interact directly with the markets.<br /><br />So not quite so useless after all....Sir Inglegramhttps://www.blogger.com/profile/17054654821777389211noreply@blogger.com