As currencies fluctuate in value almost hourly, expats would be forgiven for worrying about the impact the volatile markets are having on their cash – especially if they are in retirement and living on limited savings.
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Now, one expert says that with some planning, expats can safeguard themselves from currency movements – a big help should they be making big purchases such as buying property.
Mark Bodega, a director at currency brokers HiFX, says expats who use more than one currency for their financial arrangements can see huge differences to their wealth because of these foreign exchange moves.
He says the best way for mitigating against these movements is to use forward contracts.
When most people buy currency they do so using a spot contract which is the value of the foreign exchange rate on that date.
How futures work
However, expats could begin using forward contracts which would mean buying the currency at today’s rate but paying up to one year later.
The eventual price is calculated by taking the exchange rate on the day the currency was bought and the interest rate difference between the buying and paying dates.
Forward contracts only make up 10% of the business carried out by a typical currency broker.
However, for an expat shifting a lot of cash, such as paying for a property, forward contracts make perfect sense.
Mr Bodega said: “The people using forward contracts are usually looking to be protected from risks on the exchange rate or they believe the rates will move against them and just want to the transaction done.”
Around 90% of people using forward contracts are doing so for peace of mind, he added.
Trading currencies
The main point about forward contracts is that they are a cost-effective way to protect against currency rates moving against the usual currency an expat uses.
To underline this, a forward contract brings certainty because the buyer knows how much they will have to pay. For instance, if buying a home, should the currency exchange rate strengthen in the short term, the extra cash needed to complete the purchase may make the deal fall through.
Interest in the mechanics of trading currencies is growing because the world’s major currencies have had a volatile year.
The Euro is still coming under pressure because of the on-going debt crisis in Cyprus and many South European countries.
Currency traders are also worried about the future of the US dollar, while Sterling has had a rocky ride because of concerns over the UK economy.
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