Let's take a look at dual currency deposits or DCDs.

These structured products provide an enhanced yield by embedding a foreign exchange option, meaning that while investors receive higher interest than a standard deposit, they take on FX risk in return.

DCDs go by many names.

They can be called dual currency investments, dual currency products, structured investment deposits, or deposit plus products.

However, the mechanics remain the same.

The investor places a deposit in one currency while effectively selling a foreign exchange option that determines the currency in which they will be repaid.

Let's consider a more detailed example.

An investor places a two week deposit in Hong Kong dollars and receives an enhanced yield of 7% per year, which is significantly higher than normal deposit rates available in Hong Kong at the time.

However, the trade off for this enhanced return is that the investor is effectively selling a foreign exchange option, which means there are giving up the certainty of being repaid in their original deposit currency.

Let's say for this example that they sell an Aussie dollar, put Hong Kong dollar call with a strike price of 5.7882 Hong Kong dollars per one Aussie dollar.

The investors' repayment currency depends on the exchange rate at maturity relative to this strike price.

If the Aussie dollar, Hong Kong dollar exchange rate is at or above the 5.7882 at maturity, the option expires worthless out of the money, and the investor is repaid in Hong Kong dollars just like a standard deposit.

However, if the Aussie dollar weakens relative to the Hong Kong dollar and the exchange rate falls below 5.7882, the bank exercises, its right under the option converting the investor's deposit into Aussie dollars at the pre-agreed rate.

At the time this deposit was made, the spot rate was 5.7924 slightly above the strike price.

This means that at inception, the option was out of the money.

However, if at maturity the Aussie dollar weakens to say 5.75, the investor will be forced to convert their deposit at 5.7882 instead of the lower prevailing market rate.

This results in a loss relative to converting at the spot rate as the investor is receiving fewer Aussie dollars for their Hong Kong dollar deposit than they would in an open market conversion.

In other words, the investor benefits from an enhanced yield, But takes the risk that they will receive repayment in Aussie dollars at an unfavorable rate if the currency weakens.

If the Aussie dollar had depreciated significantly, they will receive less value in Hong Kong dollar terms compared to converting at the market rate. At maturity. DC Ds are widely offered to retail clients in Hong Kong, Singapore, and several other Asian markets, typically with durations ranging from one week to one year.

By contrast, in Europe and North America, regulators impose stricter protections on retail investors limiting the availability of deposit products with embedded options.

As a result, DCDs are generally not marketed to mass market retail clients in these regions.

However, DCDs remain popular among wealth management and private banking clients who actively manage their foreign exchange exposure.