My initial steps into investing and finding value for my money usually saw a bombardment of questions on whether or not I was travelling whenever I purchased foreign exchange with the primary option being United States dollars (USD). However, there are more opportunities which exist beyond the narrow scope of saving in foreign exchange (FX) to limit the impact of depreciation and find a way for your money to work.

Although many people have perpetuated the concept that saving in USD will solve all their problems and maintain the value of their money, that is nothing more than a flawed view since nominal value via the exchange rate tends to perform below inflation. Inflation is the sustained increase in prices over a period of time and can be influenced by many factors. However, the United States of America (USA) tends to have an inflation rate around two per cent while Jamaica sees six per cent which creates a differential of about four per cent.

The Jamaican dollar (JMD) is usually expected to depreciate by this amount in a given year barring the actions of the central bank (Bank of Jamaica) and the market demand for USD. The interest rate for a typical foreign savings account is usually 0.10 per cent at most Jamaican banks. All of this just emphasises that one has to consider several factors when saving only in a foreign currency. So, if the JMD is expected to normally depreciate against the USD and interest rates are low, how do I protect myself if I want to lower my JMD holdings?

Locally, there are USD repurchase agreements, USD bonds, USD indexed bonds, USD unit trusts and the USD Market of the Jamaica Stock Exchange. All of these financial instruments carry different levels of risk and generally higher minimum amounts to subscribe to than their JMD counterparts minus the USD stocks.

Companies like Proven Investments Limited, First Rock Capital Holdings Limited (FRCH) and Sygnus Credit Investments Limited which trade on the USD market generally have a five per cent tax free dividend yield. This means that an investor can expect to get back US$5 in dividends if they invest US $100 into the stock. There is also the allure of the stock price movement which will allow you to improve your general holdings through a buy, exit and re-entry strategy.

This has been quite evident with FRCH which has had a noticeable spread between US$0.07 and US$0.09 with the stock hitting a 52-week high of US$0.1189 recently on the publication of their audited results. Proven has returned more than 90 per cent of original shareholders capital since 2010 in the form of USD dividends with the stock still up by 150 per cent for those investors.

What does an investor do if they want to capitalise on market opportunities in the USA and other parts of North America but lack enough capital? This is where a strategy called carry trade comes into play. This involves borrowing in one currency at a low interest rate and investing the proceeds into an asset which yields a greater rate of return above the interest rate. A local pioneer in this right was Proven who used this strategy to build their balance sheet after the fallout from the 2008 financial crisis made this strategy very profitable.

A simple example of this strategy can be with Apple which traded at $320 ($80 on a post-split basis) a year ago. Let’s say one borrowed $10 million at a seven per cent interest rate and converted at a rate of $143 to get US$69,930. You would buy 218 units of Apple at that price and hold it for a year. Apple currently trades at US$124 ($496 pre-split) which would mean your investment would now be valued at US $108,128. You’d have also received US$906.88 in gross dividends. After you dispose of your investment with no commission or fees, you’d have US$109,034.88 which would be converted at a rate of $149.35 for $16.28 million. After repaying $10.7 million for the loan, you’d be left with a profit of $5.58 million which would mean a 56 per cent return on the $10 million you borrowed.

This strategy could be taken a step further by hedging against the depreciation of USD by investing in Canadian ddollar (CAD) stocks. So, you would convert the

US$69,930 to CA$95,105 at a rate of USD-CAD of $1.36. You could then buy 1,691 units of Bank of Nova Scotia (BNS) at CA$56.18. A year later, the investment would be valued at CA$136,971 as BNS trades for CA$81 with CA$7,609.50 in gross dividends. The USD-CAD rate has now decreased to $1.20 which means the USD purchases less CAD now. After liquidating your investment, you’d have C$144,580.50 which would then be converted to US$120,483.75 and then $17.99 million at home. After paying off the loan, you’d now have $7.29 million in profit against an original $10 million for a 73 per cent return.

Despite the BNS stock giving a slightly higher nominal price increase, the higher dividend yield and FX differential along the three currencies provided a much higher return. Although leverage can magnify losses if one is wrong in your strategy, it is also a solid way to amplify wealth without the need to constantly buy and sell your original stock holdings all the time. Understanding the real return on your money beyond the FX rate to the JMD can provide better value for money especially where you find an asset which delivers value above inflation and other risks.