How the foreign currency markets affect buying property abroad

How the foreign currency markets affect buying property abroad

One of the major elements that differ when buying a property abroad is the exchange rate and surprisingly, has been overlooked until recently. It was only in 2008-09, during the economic turmoil did everyone understand the power of volatile exchange rates and now, it is the biggest mind occupier for buying assets abroad.

To understand this more clearly, you might think that deciding which property to buy is the biggest decision to make but in reality when to buy is a bigger decision. Because of the increase in volatility of rates, for example between the Pound and Euro, you can save a lot of money by understanding this volatility. If you bought a house in France costing 300,000 Euros this might have cost 250,000 Pounds at one point of time or 260,000 Pounds depending on when you bought the currency. So, just the decision when to buy would save 10,000 Pounds.

Now, having understood the power of the exchange rates, let us understand what is to be done. The currency markets are extremely volatile and change with every second. Imagine finalising a deal with a property owner and by the time, the deal is signed; the currency rate goes 3% (percent) against you. A few tools can be used as follows.

a) Forward Transactions: This is the exchange of currency at the prevailing rate for delivery at a future date, before the contract is signed the rate is mutually agreed upon which will reduce the risk drastically.

b) Limit and Stop/Loss Order: This type of exchange is where the buyer can choose a more beneficial exchange rate at which they want to trade on, and if the market hits that desired rate, the contract is executed. You can limit the loss, by placing an order to execute a trade at a rate lower than the desired rate, to ensure a worst case scenario. This will limit the loss.

c) Buying / Selling currency: This is a risk hedging strategy. For example, when buying a property in Euros, you sell Pound's at a pre determined rate for future delivery, usually by paying a premium. If the rate doesn't reach the desired rate on the day the contract expires, you benefit by being able to trade at the original rate. However, if the exchange rate on the day of the contract expiry is higher than that at the start, you would trade at the prevailing rate and lose your premium. Either way, you are benefiting from any up rise in your currency value and limiting your downside risk.

Thus, by doing your home work and by selecting above strategies, the affect of the foreign currency fluctuations can be taken care of.

By speaking to your Specialist Currency Broker all these options will be explained as well as any necessary data releases upcoming that may affect your transfer. On big data releases (interest rate decisions, GDP, Housing or Inflation figures) it is not uncommon to see the markets rise or fall up to 1% in a matter of seconds.

If you have any Currency Requirement upcoming please feel free to get in touch and I would be more than happy to explain exactly how any of these options could benefit you.

Dilesh Vyas

Resolution FX

www.resolutionfx.com

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