There are number of tools and techniques available to currency buyers that can help avoid the risks imposed by the rapidly moving currency market. Most currency brokers will be able to offer you these risk avoidance tools. It is all very well negotiating a good price for your overseas property but so many people throw away their savings by not considering the implications of exchange rate fluctuations. No one can control the currency markets or predict in which direction they are going to move. Wildly moving exchange rates can have a detrimental effect on your budget or anticipated profits and any shrewd investor should consider the currency market tools explained below.
Spot Contract
A Spot Contract allows you to buy currency at the prevailing exchange rate and pay for it straight away. Spot contracts are generally used when foreign currency is required immediately, for example, a deposit on an overseas property. The currency is purchased from a broker and will usually need to be settled within 2 working days. This method is the best way to buy currency quickly and at the best exchange rate.
Forward Contract
A forward contract allows you to fix the exchange rate now for a specific date in the future. Forward contracts are ideal when you only need foreign currency at some point in the future but don’t want to expose yourself to adverse currency market movements. For example if you were buying a property overseas with the settlement price to be paid in a month, you would not know the exact cost of your property until you had bought the foreign currency and paid for the property. The currency market moves 24 hours a day and this would cause the cost of your property to fluctuate 24 hours a day. A forward contract lets you fix the cost of your property now. You wouldn’t buy a house in your own country if you didn’t know what it was going to cost, so it is always a good idea to protect yourself. With forward contracts you secure your exchange rate now and only pay when you actually need it. Rates can usually be fixed for up to two years.
Limit Order
A Limit order can be used if you have got time to hold out for a really good exchange rate. As mentioned above, the currency market moves 24 hours a day and if the exchange rate moves in your favour whilst the UK market is closed for example, you may miss the opportunity to take advantage. A limit order is an automated order to buy or sell currency that will be executed by a computer when the exchange rate reaches the level that you have specified. This tool is useful when you need a specific exchange rate in order to stay within a budget. You can set a higher level or limit to take advantage when the market moves in your favour or a lower level stop to protect yourself if the rate moves against you.