david_bagshaw
Well-Known Member
Speak to Baydonhill. They have served me well when the boat was in the Netherlands.
How to forward buy Euros?
- Thread starter Whitelighter
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gjgm
Well-Known Member
dom
Well-Known Member
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D
Deleted User YDKXO
Guest
Buying a forward contract from your bank or a currency trader is obviously the safest way of buying a certain amount of foreign currency by a certain date but there is another way if you're feeling a bit brave. If you feel like having a punt on Sterling getting stronger against that currency and the bank or trader permits you to do it, you can speak direct to the foreign currency trading dept and place a 'market order'. This means that you authorise the bank to buy foreign currency at a certain rate that you decide yourself. Say for example the Euro is trading currently at €1.28/£ and you think that Sterling may get stronger, you might place a market order for the amount of Euros you need at €1.29 or €1.30 or whatever and then it is up to the currency traders to get that rate for you. The traders only earn their corn by doing trades so they're motivated to get the rate you want. If they do get the rate you are committed to the trade and you need to have the Sterling available immediately and an open Euro account for them to place your Euros in. Of course if the traders can't get your market order rate before you need the foreign currency, you could be forced to buy the currency at whatever the rate is at the time you need it which means you could end up buying it at a lower rate than the forward rate you could have bought at the beginning but then life is more interesting if you have a bit of a punt now and then
grumpy_o_g
Well-Known Member
Buying a forward contract from your bank or a currency trader is obviously the safest way of buying a certain amount of foreign currency by a certain date but there is another way if you're feeling a bit brave. If you feel like having a punt on Sterling getting stronger against that currency and the bank or trader permits you to do it, you can speak direct to the foreign currency trading dept and place a 'market order'. This means that you authorise the bank to buy foreign currency at a certain rate that you decide yourself. Say for example the Euro is trading currently at €1.28/£ and you think that Sterling may get stronger, you might place a market order for the amount of Euros you need at €1.29 or €1.30 or whatever and then it is up to the currency traders to get that rate for you. The traders only earn their corn by doing trades so they're motivated to get the rate you want. If they do get the rate you are committed to the trade and you need to have the Sterling available immediately and an open Euro account for them to place your Euros in. Of course if the traders can't get your market order rate before you need the foreign currency, you could be forced to buy the currency at whatever the rate is at the time you need it which means you could end up buying it at a lower rate than the forward rate you could have bought at the beginning but then life is more interesting if you have a bit of a punt now and then
All the advice here is pretty solid but can I add one slightly patronising word of caution - unless you want to actually be an FX trader then remember that what you are doing is MINIMISING your risk - in effect you are looking at ways of making sure you can get the Euros you need when you need then at a rate you can afford and you need that surety as cheaply as possible. If you do take a risk anywhere then either hedge it or make sure you can afford it and don;t take any risks unbounded risks (i.e. make sure the risk you take has a finite cost associated). You are not looking to make an investment here unless you think you can do better than the professionals.
Having said that Deleted User's way is very good IF you make sure that you buy at a point that you realise you have to in order to be able to afford the Euros you need (don't hang on in the hope the rate will get better unless you can afford not to do the deal). In other words, taking Mike's example then let's assume that €1.20 if that is the worst rate you can afford/are willing to pay then place your buy option at say €1.30 but also make absolutely sure you buy at €1.20 as soon as the rate goes that low. Effectively you're binding your risk to a maximum of 8c in the pound.
jimmy_the_builder
Well-Known Member
In the OP's context, what's the advantage of forward-buying the rate though? If you think the current rate is good, why not just use one of the currency services to buy what you need now? It's not like you're missing out on some giant savings rate for your sterling.
gjgm
Well-Known Member
About 40 pips against you Jimmy. If you were to assume total pricing efficiency, whether you cover today for 6 months forward, or simply do the deal value today and lose the interest rate differential for 6 months, it would be exactly the same amount of Euros and GBP either way.
Given you can probably find current exchange prices with that differ by 40 pips anyway, the only advantage might be that you do not currently have the GBP to sell
jimmy_the_builder
Well-Known Member
Yeah, but presumably there's a cost to the provider of the credit risk in effectively lending the 200k or whatever to the OP for the period of the option, no? Isn't that [credit risk cost] the only difference between buying now, and buying in the future, assuming total pricing effiiciency?
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dom
Well-Known Member
Good question and in practice forward contracts are more important in the commercial world; if say a UK boat builder knows he will receive a EUR600K euro cashflow in Sep 2015 then it might make sense for him to sell those euros forward against sterling today.
Similarly, a UK boat purchaser may have contracted to buy a new boat from a European manufacturer for say EUR900K in June 2015. He might choose to fund this purchase with a either the sale of another boat, a boat mortgage, or a combination of the two. If he sells sterling for euros today he may have to go and borrow that sterling, possibly at a silly rate. The forward contract basically enables him to time his FX cashflows to be consistent with when he is likely to actually receive/need them, but whilst simultaneously locking in today's FX rate adjusted for the interest rate differential between the two currencies.
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NGM
Well-Known Member
Because you may not have the funds for the transaction for another 6 months but you are happy with the current exchange rate.
gjgm
Well-Known Member
Ok, we need to seperate the bank's view of the OP's credit status from the pricing of the FX outright.
As someone mentioned before, the risk for a bank is that come settlement of the trade the counterparty has sunk beneath the waves, and the bank must now close out the trade with someone else and that might be at a loss if the fx rates have moved against it. So, yes, the bank may require more margin on an outright (forwarded dated fx contract)as while they may be comfortable you will deliver payment in two days, and less happy with the risk that you will deliver in 6 months.
However, on the pricing of the trade itself, as I mentioned above, it is simply the interest rate differential between the two currencies, relative to the current exchange rate and the period. There is no credit risk here on the pricing.. OP is "lending" the bank one currency (EUR) and the bank is "lending" the OP the GBP, but in reality none is lending anyone anything.
Yes, there will be two aspects to the price the OP receives- the mathematical price differential, which as we see is pretty small, and possibly an increased margin (fee) that the Bank will want as it is taking more risk on the counterparty, as the counterparty may default on the trade.
Secondly, there is no optionality here- both sides are committed to the trade at the agreed price.
Edit- just to add that you can do an FX option which does give the possibility of exercising at the rate or not, but unless OP is buying a very large boat, it probably is not cost efficient to do so !
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Deleted User YDKXO
Guest
Yes agree entirely. I didn't explain exactly what we do. As a business we are generally buying in a foreign currency and selling in Sterling so when we take an order, we use a conservative rate to calculate our Sterling price to our customer; for example if the current rate is €1.28/£, we might calculate our price at €1.25/£ and we know that at €1.25 we make an acceptable margin. What we then do is talk directly to the foreign currency trading dept at our bank and get their view on where Sterling is going to go against the € in the period to when we have to make the payment in €. If their view is that Sterling will weaken or remain stable, we will either buy the € straightaway or buy a forward contract on €. However if their view (or our view) is that Sterling will strengthen, then we may take a punt on a market order at a higher rate, say €1.29 or €1.30. Obviously until the market order is transacted, we are at risk so we keep a very close watch on the exchange rate and if it looks like the rate is falling instead of rising as we thought, we will ensure that we buy before the rate gets down to our original calculation rate of €1.25. In my business we are selling quite high value capital items at modest margins so small movements in the exchange rate can have a significant effect on that margin which is why we try to play the exchange rate with a market order if we can. Its not something I would necessarily recommend to somebody doing a one-off transaction for a boat in a foreign currency but at the very least they ought to be aware that apparently small movements in the exchange rate may have a significant effect on the Sterling price they pay for that boat