Option-linked deposits offer tastier returns
Call me boring, risk-averse, whatever - but I've always kept a big chunk of my money in time deposits. By lending my cash to the bank for a set period of time, I receive a higher interest rate than I would with a normal savings account.
Yet with deposit rates close to zero and at their lowest since 1986, I decided to find out more about 'high-yield products'.
It turned out that my aversion to risk wss not uncommon among Hong Kongers. 'Although some believe the stock market should pick up soon, the majority is sceptical about recovery,' Dao Heng Bank's head of consumer banking Sunny Cheung Yiu-tong said.
For such sceptics, Mr Cheung suggested a compromise. Products known as option-linked deposits have been around for about a year and are proving popular. Such products combine low-risk deposits with an underlying asset - stocks, indices, currencies, interest rates - which are riskier but offer potentially higher returns.
International Bank of Asia (IBA) executive vice-president Betty Brow suggested a deposit product linked to shares in HSBC, a 'solid, blue-chip company whose share price is relatively stable' and closed at HK$83.50 per share on Friday. If I agreed to deposit HK$98,400 in two weeks (March 14), then I'm guaranteed HK$100,000 back on 30 April, making a profit of HK$1,600 in 47 days. This represented a healthy annualised return of 12.4 per cent.
What's the catch? If, two days before the maturity date, HSBC shares fall below 95 per cent of the HK$83.50 strike price we agreed on - or HK$79.30 - then I am obliged to buy the shares at the strike price, although the market price is less than that.
And so, before making any decisions, I should ask myself, do I want to own shares in HSBC? And is HK$79.30 a fair price for such shares?
Another underlying asset I can link my deposit to is foreign currencies. HSBC offered a 'Deposit Plus' service, which 'allows you to earn a higher interest rate than a normal Hong Kong dollar or foreign-currency time deposit, while meeting your foreign currencies needs', the bank's Web site said.
Calling HSBC's investment hotline, I spoke to Lily and told her that I wanted to invest HK$98,400. Lily told me that in 33 days, I would earn interest of HK$467.02, representing an annualised rate of 5.24 per cent. She also set an exchange rate of HK$12.2929 to the pound, so that if the day before my deposit matured, the exchange rate fell below this, then I would be obliged to convert my HK$98,400-plus interest into the pound.
Larry Lang, professor of finance at the Chinese University of Hong Kong, warns that foreign currency investments are very risky because the foreign exchange market is so 'fully manipulated by arbitrageur and sovereignty, that it is almost impossible to predict its movement'.
Both Mr Cheung and Ms Brow said that option-linked products were becoming increasingly popular, and were not as complicated as they seem. Still, Mr Cheung said the most important factor to remember when investing was to spread your risk. 'You must remember there are no sure win gambles in this world - the higher the potential return, the higher the risk.'
And so I decided to delay my investment decisions for another day, yet again.
