Foreign exchange management is vital, whether you are considering a large international investment, property purchase, long-term property development or simply trying to manage a regular fixed overseas transfer, foreign exchange management will be paramount. Foreign exchange management applies to individuals and businesses and can impact a company’s bottom line and affect an overseas payment.
With currencies having the ability to move dramatically over relatively short periods a badly managed transfer can seriously impact a property purchase or development.
Foreign exchange management explained
An fx broker or financial institution can assist in managing foreign exchange risk by proactively assessing and executing your currency requirement. FX risk can be handled in several ways including forward contracts when the exchange rate is high or when an invoice is received, to avoid future currency depreciation.
Businesses can also manage their FX by receiving settlement in different foreign currencies and hedging the exchange rate when anticipating substantial payments from Overseas businesses.
An fx risk aversion can additionally be carried out for individuals making a one-off considerable purchase. These can consist of targeting superior prices with a limit order or locking in a foreign exchange rate when the currency
required strikes a 3-month high. FX contracts such as these can be very efficient when moving overseas or buying a holiday house overseas.
Foreign exchange management – overseas property purchase
When purchasing or investing a significant amount of money overseas there are many ways you can ensure your budget doesn’t need to spiral dramatically out of control due to volatile currency movements. As mentioned in previous guides Foreign exchange brokers offer several foreign exchange contracts to ensure your purchase goes smoothly whilst offering the maximum amount of flexibility. However, the real key can be in implementing a number of these options to both manage the risk of your base currency devaluing whilst having the possibility of being able to benefit from a superior future rate should the market rise in your favour. This can be particularly beneficial around times of political uncertainty or when data releases have been inconsistent.
French property purchase FX management
A couple decides to fulfil their dream and commit to buying a property in southern France. They have an offer formally accepted at the end of February and after reviewing the contract proceed with the initial ‘compromise de vente’ at the beginning of March. The legal work is promptly dealt with by the solicitor and they perform a spot transfer a week later and receive a GBP-EUR rate of 1.28. The sale moves on nicely and a sale date is agreed for the last week March, the couple is therefore expected to credit the solicitors account a few days before. They promptly agreed to arrange the remaining funds to be transferred and received a rate of 1.27. Many of you may consider this particular process to have been fairly well executed however there are some ways of improving this scenario and limiting risk whilst having the ability to benefit from higher rates.
Benefits of risk management tools and market orders
During this time particular property transaction period the market hit a low of 1.237 and a high of 1.2882. Had this couple received the correct amount of consultancy they could have benefited from a superior rate with a market order but more critically have protected themselves against adverse fluctuations via a Stop loss. Imagine if the downward trend had continued or they had simply found the property a few months before. They would have been obliged to transfer their final property payment based upon a rate of 1.23. For every £100,000 being transferred this variation would equate to the differential of EUR 5,182 just over a few months.
Benefiting from foreign exchange market highs
Another example of the advantages of currency management being beneficial is when markets hit highs. One way of benefiting from these highs is when making frequent mortgage payments. For instance, if you are the owner of a property overseas and you have a monthly € mortgage commitment. if you learnt that USD/EUR or GBP/EUR had hit a 6 month high you may be tempted to fix a portion of your mortgage payments.
Many Foreign exchange specialists offer Foreign exchange management for clients wishing to guarantee their fixed cost and can offer the ability to fix the rate for a few months to two years. The client will just simply fix the total Euro amount needed for the agreed period and fix the rate with a deposit. The client will just transfer the GBP or USD amount which will be converted at the previously agreed fixed rate. Therefore, the client would avoid fluctuations and know the exact cost of his mortgage for up to 2 years.
Business foreign exchange management
Foreign exchange management techniques are crucial for businesses that operate globally, particularly if their prices or profits are derived in foreign currency.
Companies can apply foreign exchange management strategies to minimise these currency risks. This might entail purchasing particular FX contracts to compensate for their liabilities and assets. FX brokers most typically provide forward exchange contracts and FX options contracts to balance out the responsibilities and possessions.
Foreign exchange management personal transfers
Whilst commonly a person will only be managing a handful of forex needs, comparable products to businesses will be readily available to manage their overseas money transfers.
These can be utilized to hedge FX risk for an overseas purchase, guarantee the foreign currency amount on a pension or salary. Essentially ensuring the money transferred is executed at a good exchange rate as well as ensuring your wage is not affected by fx volatility.
If you would like to learn more about foreign exchange management in order to get the best value on your international payments, please feel to get in touch [email protected].