Re: “The true risks of the double-currency unit,” by Richard Croft (IE, May 2009).

Richard Croft made some fundamental errors in his recent column on UBS’s double-currency units, or the DOCU, and it’s important for readers to understand what kind of investor can use the DOCU; how UBS is able to build this structured product; and, finally, how the DOCU is definitely not for investors to structure by themselves at home.

The DOCU is for sophisticated investors who have substantial cash positions in multiple currencies. Croft wrongly concludes that the DOCU is a “guaranteed investment certificate with the potential to earn a higher rate of return.” This error outlines why the average retail investor needs to know the difference between a GIC and a structured product that treats foreign exchange as an asset class.

UBS Wealth Management in Canada serves high net-worth and ultra-high net-worth investors. These clients tend to have global investments and multi-currency needs for their personal and business interests around the world. UBS developed this product more than 10 years ago as interest rates began their decline to record lows. As some clients began to reduce their equities positions in the market, they began to build up substantial cash positions in multiple currencies. With little or no yield on cash, UBS was asked by these clients for cash enhancement strategies.

UBS was able to develop the DOCU because of the depth of resources, expertise and innovation that comes with being a dominant player on the global foreign-exchange markets. UBS deals in highly liquid markets in multiple currencies equal to $510 billion a day, and is able to match virtually any currency in a DOCU.

Croft misreads our brochure by stating that there is an “expectation that the DOCU is an alternative to a money market instrument.” The DOCU is a structured product that works in addition to a money market instrument. To enhance yield, the DOCU simply pairs a currency option with a money market instrument.

Croft wanted to highlight the risks, and that’s appropriate and something we discuss with clients. The fundamental risk of a DOCU is that the client’s position is converted to the other currency. In other words, in the case of a Canadian dollar/U.S. dollar DOCU, the client’s cash is converted into US$ if the strike price is reached. There’s no need to repurchase a short call or cover a position because we allow the currency to be converted; the client now has US$ instead of C$. Clients are still paid interest on their cash deposits and they are still paid for the call option. This results in a total yield typically in the range of 4% to 14%, depending on the price of the option.

If there is massive volatility in either currency during conversion, this could result in a devaluation of the originating currency against the target currency. The key point to remember is that investors using a DOCU have uses for both currencies. If clients are converted to the other currency, they can also turn around and write a US$/C$ DOCU.

It’s not prudent to oversimplify structured products or create a homemade version. As with any structured product, there are multiple variables and costs. For example, Croft does not state the terms of his 5% DOCU —i.e., the spot, strike and expiry. He simply was not comparing apples to apples. Instead, he compared the 5% DOCU, which was an out-of-the-money option, with his homemade version, which was an at-the-money option, so the two carry completely different risk profiles. Further limitations of his homemade version come to light after surveying the Philadelphia Stock Exchange and the options he looked at: they are limited to one expiry per month, US$/C$, limited strike prices, very wide bid/offer spreads, with most of the contracts showing no volume at all.

At UBS, our global reach and depth of resources allows us to make markets all around the world, ensuring daily expiry dates, multiple strike prices, narrow bid/offer spreads and access to highly liquid markets. Croft didn’t calculate the cost of buying all of those options — a price that is considerably higher for an individual investor than it is for an institutional money manager such as UBS.

Comparing the UBS DOCU to a “homemade version” does not provide a helpful benchmark. What this example does show is the challenges of replicating a structured product based on a glance at a brochure. I do hope that most people understand that a UBS brochure is a high-level information document and not a formula or recipe for the do-it-yourself investor.

@page_break@High net-worth investors are encouraged to review the brochure and then contact UBS so that we can meet to determine if such a structured product is appropriate for their needs.



Graeme Harris

Head of corporate communications

UBS Canada, Toronto



Richard Croft responds: Graeme Harris contends that the DOCU is not something that average investors should try to structure at home. I agree.

On another point, I did not conclude that DOCU is a “guaranteed investment certificate with the potential to earn a higher rate of return.” Rather, quite the opposite. This is a sophisticated investment that for those in the industry, whom Investment Executive targets, should understand. My explanation as to how the DOCU was constructed was just that — an explanation.

Harris contends that I misread the UBS brochure by stating that there is an “expectation that the DOCU is an alternative to a money market instrument.” My first experience with this product came to light when it was passed to me by way of an unsophisticated client who thought just that, and wanted to know how it worked.