How to mitigate your currency risk
By choosing to work with us on your overseas payments, you are not only going to be saving money on just exchange rates alone. With our experience and market knowledge, we will work with you to ensure you make an informed decision on what to do with your money.
Remember, banks won't explain to you how to mitigate your risk when entering the currency market or offer suggestions of what you can do based on other people’s decisions. They will not work with you to hatch a plan based on what level of risk you are happy to take with your money, as this market is a complete gamble. We will and then some.
We will hold your hand through this process as much as you want us to. However, choosing some or all the below, is essential when entering the currency market. If these products are used by 9/10 UK businesses sending money abroad, don't you agree you should have access to them too?
Instead of deciding what to do on the total figure you require, think about exchanging bit-by-bit. This is a great way to reduce your overall FX exposure (and stress), whilst at the same time not putting all your eggs into one basket for those with higher risk appetites.
For example, on a £100,000 exchange you could hedge by locking in £25,000 at a time. The thought process here would be some of what you need is booked in with the first tranche, so you have a benchmark and anything over this is a bonus. Anything achieved under this and at least 25% was locked in when the rate was better rather than 0%.
Hedging gives you the chance to hopefully improve your overall rate of exchange, as you are splitting the total amount into 2,3,4 or more trades, whilst also eliminating some anxiety of where the market may go. 80% of our customers choose to hedge in some way when purchasing a property overseas.
Rate alert & Limit Order
Setting rate alerts saves you the worry of watching exchange rates all day, every day (this is not recommended, there is more to life people!). Both realistic high and low rates should be set, to allow you to capitalise when the rate spikes and to counter if the rate suddenly falls.
For example, if the £-€ rate was trading at 1.17. Depending on your timeframe and budget, you could set rate alerts for 1.18 & 1.15. You will be notified when either rate has been hit, and it will be up to you to decide on whether to go ahead with an exchange or not.
The alternative to this is what is known as a ‘limit order’. This product automatically buys on your behalf once your desired rate has been met. Either product is used by nearly every customer we deal with because it just makes sense.
This is a ‘buy now, pay later’ product, that allows you to lock in an exchange rate for a date in the future. A 5%-10% deposit is required of the total amount and you can fix in the rate for up to 12-months. You can part or full drawdown before the end date and there is no minimum amount to exchange.
For example, on a standard 3-month forward contract for £100,000. £5,000 will be needed for the deposit to be able to lock in the rate for the total amount required. £95,000 would then to be sent once the contract ends in 3-months’ time.
The downside to this tool is that because you are buying currency in advance, you slightly lose points compared to a standard SPOT trade (money arrives and is paid away within 2/3 days). In monetary terms, each month would cost you roughly £90 in comparison on a £100,000 exchange. The other is that if the rate goes up during the time you have the contract, you do not receive the higher rate when it ends as the currency has already been bought.
This is a commonly used tool for businesses that import goods from overseas so they can fix in their profit margins on products. 3/10 people purchasing property abroad use it and if you have a low-risk appetite, are on a tight budget or just don’t want the headache of rate watching, this is the choice for you.
On average, exchange rates swing by 2% a month. Meaning on a £100,000 transfer, rates can improve your budget by €2,000 or decrease it by the same margin, depending on when you execute a trade within the month. In a hypersensitive market in which we are in now, there can be 5% swings, making it very hard for you to know exactly what your budget is going to be when looking to purchase or renovate a property.
A common mistake people make with their budget is using the exchange rate they see on TV, internet or in the newspaper as achievable for their money. The first problem with this is exchange rates change every two seconds, they never remain still and react sharply on economic and political news all day, every day.
Secondly, these exchange rates are advertised in disclaimers as ‘tourist’ or ‘mid-market’ rates and are simply not available to anyone. They are provided for guidance purposes only and achievable rates will normally be 1-5 cents below these publicly advertised rates, so it is important you do not use these when budgeting. The ways to find out exactly what your £ is worth in €, is by logging into your internet banking, speak directly to your bank or open an account with a specialist currency company like us.