How to deal with foreign currency risk (part one)

foreign currency risk – Published on Mar 24, 2016

foreign currency risk

0:11welcome to this killing explains finance video this week how to deal with foreign
0:17currency risk as a UK investor now what is the risk was essentially as a UK
0:23investor investing overseas which is a good idea by the way you’ve got two
0:27problems one is called investment risk that is the fact that when you invest in
0:31SE us’ dollars in america in american investment it could rise or fall in the
0:36local market but on top of that the UK investor you’ve now introduced currency
0:41risk which you wouldn’t have with the UK investment that’s the idea that the
0:46exchange rate between sterling the dollar could move that will affect your
0:50overall returns
0:52let’s take a look at how and whether you want to do something about it now and I
0:56can you got a thousand pounds to invest in you decide not to invest in the UK
1:00you invest it in the us- markets you need to translate into dollars and
1:05that’s taken exchange right of one pound to $1 50 that give you $1500 to invest
1:10in the you s market and you invested successful leaders say what I mean by
1:15that

foreign currency risk
1:16well the investment rises by $500 so now you got $2,000 of us’ investments the
1:23original 1500 + 500 and you think right enough that’s cash in hand you bring it
1:28back at this is quite important
1:31the same exchange rate you invested that’s unrealistic I’m not ignoring
1:35transaction charges in bed too often spreads let’s say you can bring it back
1:39and exchange rate hasn’t moved great that becomes one thousand three hundred
1:44and eight rebounds in sterling which is a three hundred and thirty-three pound
1:48profit on your ritual investment of a thousand pounds fantastic so far so what
1:55were his the so-what let’s imagine this time
1:59same scenario you invested $100 rises by five hundred to two thousand dollars but
2:04when you bring it back to the UK the exchange rate is moved the dollar has
2:10weakened or conversely the pound strengthened suddenly $2,000 at this new
2:15exchange right one pound to do dollars only turns back in 2000
2:21in sterling which means your overall sterling profit 0
2:25didn’t investment rise $500 exchange rate is cancelled out all of those games
2:31now I could work either way of course I think about foreign currencies imagine
2:36you got your $2,000 investment out there you’ve made the save $500 gonna bring it
2:40back to the UK and the exchange rate happens to be one pounds $1 so this time
2:46the dollar strengthened all the pounds weakened as the jargon goes turned two
2:51thousand dollars back and that reigned sterling it becomes 2,000 pounds
2:55suddenly wow you made a sterling proper 2000 alright you got a local currency
3:01and batsman profit and you made some money on the translation back into
3:06sterling great but the problem is as a huge range of outcomes everything from
3:11not making money to making driven rebounds to doubling your money and the
3:15chunk of that is down to foreign exchange movements so I should do not
3:21bother turning out that some people would just say so that stuff that I
3:25don’t care I am exposed to foreign currency risk but actually I don’t know
3:30I can afford to live with that level of risk gamble that the foreign exchange
3:34rate my cum in my fight in which case you don’t hedge but you have to live
3:40with the uncertainty I just mentioned so a lot of investors won’t warn that
3:44foreign currency rates doubling in what I don’t want to do lots of hard work
3:48choose the right investments overseas get that right now the whole lot and
3:51dilated by foreign exchange gains so actually I do want to do something about
3:55it I’m not comfortable running foreign exchange risk luckily the coupler
3:59sensible practical things you can do relatively easily so you get better
4:03visibility over cash season payments points you there an attempt to certain
4:07people that I kind of doing larger or more regular transactions overseas and
4:12just don’t wanna run or can afford to run more importantly that level of
4:16foreign exchange rate risk currencies are pretty volatile so you know that
4:19risk is always out there talking to do well one option if you are somebody that
4:25has assets overseas and is going to keep assets overseas and all you regularly
4:30travel overseas maybe work in other markets
4:33inmates quite a bit of sense of foreign currency bank account in each of the
4:37market that applies to you have assets in the you s property for example
4:41generating income in the us- you don’t bring that back into the UK you can
4:45afford to leave in USQ the exchange rate risk paying into a us-dollar bank
4:49account in the us- and then use it pay $1 expenses in the you s so I keep
4:54everything you want to call it that
4:56offshore outside the UK and you might run those bank account number of
5:00different countries if you’ve got a set in those countries and/or you you work
5:05visit regularly can make a lot of sense but then there are people saying well
5:09actually that’s quite expensive that’s got a lot of hassle you know I don’t do
5:13enough business to justify dust-up approach so is there an alternative and
5:20there is there is something going forward contract is quite useful what
5:24you could do is say you know someone who wants to pay for a house costing
5:28$500,000 in three months time so maybe you decided to buy a house in the USA
5:34market rout is a second property if you’re fortunate to be in a position as
5:38retirement property you’re not someone who’s making a series irregular
5:41transactions is kind of a one off and you’re worried about what the exchange
5:46rate might be in three months time because the problem is that moves you
5:51don’t know what you’re stating commitments get in the heat of fun that
5:54house purchase not say at the moment and they’re often quoted like this you want
5:58to exchange rates one-pound to $1 6666 as just a quotation convention we could
6:05do is pick up the phone to a UK currency broker and say look I need to do a deal
6:10now three months now all I want to sell you three thousand pounds sterling as a
6:16much-loved all fixed rate of made it same rate as frustration $1 6666 the
6:24advantage of that is that when three months goes by you will get from your
6:30currency broker the dollars that you need my house and was the uncertainty is
6:36gone
6:36certainly would you take $3000 in three months time
6:40translated
6:42change right then and it may or may not be $500,000 this way you take out the
6:47uncertainty and it works the other way around by the way you could be someone
6:51who’s selling a house in the you s one of transaction don’t do it very often
6:54you get $500,000 in three months it takes a while the cash to come through
6:59you thinking what you change right changes I need to know what that’s worth
7:03installing made over to pay down my pension money comes in contact sports
7:06sit and wait so you’re thinking with a spot right now is one dollar buys you
7:11point six pound if you like so could I do a deal with a broke up I agreed to
7:16sell you now
7:18$500,000 in three months time at a fixed rate of that was your not handed over
7:24the money now in the right now and that means that in three months time you’ll
7:30get $500,000 wholesale you have a straight over to your currency broker
7:35here and they give you the amount you’re expecting you need three hundred
7:40thousand pounds sterling you coulda left it all the jobs you didn’t want to take
7:44the risk now in practice just mention this there are few things I’ve ignored
7:50alright I’ve ignore the fact that today’s exchange rate for foreign
7:54currency deal isn’t going to be exactly the same as the one you’re quoted by the
7:58broker in my examples there is a gap spot rates and forward rights and
8:03spreads but hopefully you can see what I’ve just done that there are at least a
8:09couple of ways that you can lester can take out some of that foreign currency risk

 

How to deal with foreign currency risk (part one)
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