A coupon bond that gives its holder an option on redemption in a foreign currency (a currency other than the one denominating it, i.e., the base currency). Otherwise, redemption would take place in the original currency. This bond consists of a coupon bond and an embedded put option (on redemption in another currency).
In other words, with currency switch deposits (also called dual currency redemption notes or dual redemption bonds), the issuer has the right to pay or the bondholder has the right to receive the redemption amount denominated in a foreign currency at maturity. If the embedded put option is exercised, the face value of the bond will be converted into the foreign currency at an exchange rate predetermined at the time of issue. For a holder, it would be beneficial to exercise this option if the foreign currency has appreciated. Payment in a foreign currency can involve both coupon payments as well as the redemption amount.
For the issuer, exercising the right to redeem in a foreign currency if the foreign currency has depreciated against the base currency.
Comments