How to deal with foreign currency risk (part one)

How to deal with foreign currency risk (part one)
Photo by geralt (Pixabay)

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

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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
6:36certainly would you take $3000 in three months time
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


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