The Shocked Investor is yet again shocked. HSBC Canada had this ad on the weekend, and also on their web site:
It is advertised as a low-risk product. Anyone who thinks this is low risk should read the book Traders, Guns, and Money. It is full of examples of these currency deals - gone bad, all advertised by unscrupulous dealers and banks.
3.25%: Chances are ZERO.
There is an obvious risk. The chances of your investment returning 3.25% are virtually ZERO. If the Canadian dollar appreciates, investors will pay dearly, in fact they may have a negative return (anb vice-versa). Canadian rates have only onw way to go... This is, by the way, what the Japanese have been doing for years.
What have the governments done!
For Canadians, note that the investment is also not insured by FDIC.
A Much Better Deal
A much better deal is simply to buy FXA, the AUD ETF, which pays a current yield of 2.21%. On this, you can sell covered call options. For example, FXA is currently trading at $93.91. By selling the November 2010 95 call options you will make $6, or an instant 3.8%, or the 94 call for $6 (6.4%). Then, in June you will still have another 5 months to sell more options. Let's say you sell them for $2.50, or 2.6% ($3.10 for the 94s, 3.2%). You pocket in total, somewhere between 6.30% and 9.70%, plus the yield, for a final grand total of around 8.4% to 11.9%. You may also sell shorter time frame options for even more income, with a little more work.
You may also sell puts before entering the position. For example, you can sell the Dec 93 puts for $1.40, thereby instantly reducing your cost to $92.51 if you really want to buy the AUD. At that point, the yield will be higher than 2.21%.
Of course if the AUD goes down, you can still lose money, but significantly less than with HSBC.
And your money would not be locked for 1 year.
Amazing! Very easy money for HSBC. Of course they have many other ways of making money out of this, with ZERO risk - for them.
Note that we track all currency ETFs live here.