Any experience with buying foreign CDs?

[disneysteve]

Kiplinger has an article this month about buying CDs from other countries through EverBank. They are paying well above US rates. For example, South African rand CDs are 7.5% for 3 or 6 months and Icelandic krona CDs are 11.63% for 3 months. They all have a $10,000 minimum. Of course, the risk is that the value of the currency could fall relative to the dollar which would affect the value of your account.

So does anyone here have any experience?

[katwoman]

My dad did this. Made incredible returns ( >20%) and he didn't even have to convert from dollars to the local currency! Of course this was back in the day before the Patriot Act and when you could literally carry money on planes in a satchel.

[disneysteve]

My dad did this. Made incredible returns ( >20%) and he didn't even have to convert from dollars to the local currency!

With EverBank, you also don't convert currency, but you do have currency fluctuation risk.

Anybody else have any thoughts on this.

[humandraydel]

Steve,

As I'm sure you know, this is really no different than buying a foreign bond (in a foreign currency). There is certainly nothing wrong with this and it can be a useful component of a diversified portfolio. International stocks, bonds, and even real estate are often recognized for their diversification factor. That being said, the risks (and of course reward) are magnified by the currency fluctuations. I know you know this.

What's my personal opinion? I am okay with the currency risk but like anything else, I want to diversify that risk. In other words, I wouldn't want to risk a lot of money on a single currency. The solution would then be to buy several small CDs from various countries or buy a diversified international bond fund. For simplicity and the added diversification, I'd be inclined to go for an international bond fund.

[Scanner]

Interesting - are there insurance agencies for banks in other countries protecting your principal?

[Fern]

Do they have an FDIC equivalent agency that guarantees the money is secure?

I wouldn't feel comfortable doing this. What happens if you don't get your money out of there? ARe you going to travel to South Africa? Then what?

Without knowing more, I dont' think the returns are worth the risks.

[disneysteve]

Interesting - are there insurance agencies for banks in other countries protecting your principal?

Do they have an FDIC equivalent agency that guarantees the money is secure?

You aren't actually sending your money overseas. EverBank, a US online bank, maintains the account and it is covered by FDIC. But FDIC does not cover principal loss due to the foreign currency losing value against the dollar.

EverBank - World Currency CD

[Scanner]

Ah, I see.

Well, you would expect to see a proliferation of this, given the dollar is so historically weak, right?

Seems like a timing thing - if you were doing it, you should have done it years ago.

[disneysteve]

Seems like a timing thing - if you were doing it, you should have done it years ago.

I don't know. That 11.63% Iceland CD looks awfully attractive. How would I go about calculating how much change in the dollar's value would have to occur for me to not come ahead of a US CD? I mean, even if I didn't actually earn 11.63%, a return of 7 or 8% would be just fine with me.

[safari]

There is website shows graphs of historical exchange rates between various currencies and US dollar. For example, here is the 90-day graph for Iceland Krona: link.

[disneysteve]

There is website shows graphs of historical exchange rates between various currencies and US dollar. For example, here is the 90-day graph for Iceland Krona: link.

So how would I go about calculating how the value of a hypothetical $10,000 investment would fluctuate over that period?

[safari]

So how would I go about calculating how the value of a hypothetical $10,000 investment would fluctuate over that period?

Let's say when you opened your CD, the exchange rate was 64 Kronas to $1, and when your CD matured the exchange rate was 67 Kronas to $1, which means that Kronas depreciated 4.69%. If you had a 3 months CD with 12.14% APR, that means you earned roughly 3.035% after 3 months, but if you deduct the depreciation, you're actually losing money. If Krona appreciated, you would get a nice return, but it's a gamble.

[humandraydel]

Steve,

Assume a $10,000 Icelandic Krona CD earns 11% interest. Now assume the value of the Krona drops 5% in a year. The result is:

10,000 * 0.95 * 1.11 = 10,545

Obviously this is equivalent to a dollar denominated return of 5.45%

In other words, to calculate allowable currency fluctuation to match a dollar denominated return on investment the equation would be:

X (% drop in currency value) = 1 - (% APY in dollars/%APY in currency)

X = 1 - (1.0545/1.11)
X = .05 or 5%

So if you want to get 7% APY in dollars the currency can only fall:

X = 1 - (1.07/1.1163)
X = .041 or 4.1%

[disneysteve]

Thanks to both of you for the response. I guess it is pretty risky looking at that 90-day graph. Of course, there was a lot of action in the equity markets during those particular 90 days which might have something to do with the sharp swing, but no way to know that the same thing couldn't happen during the time I held the CD.

Like they say, if it sounds too good to be true... If earning 12% was easy, we'd all be doing it.

[glock35ipsc]

Check their fee structure carefully. The info I received from them showed, among other things, a 1% currency conversion fee both ways; when you buy, and when you sell. That is the biggest complaint I have heard about them is that their fees usually come close to wiping out any gains.