Currency Hedging

[JoeJoe]

Hi,

i am not an active trader and do not know much about options and the vocabulary. Here is my project and i am looking for some advise:

I am planning to buy a house in the US so i want to transfer 100k euro to usd. This has to happen between now and mid October 2015.

I have the money cash sitting in an account so i could exchange it by monday. But i could also wait for a better exchange rate than right now. A 1 cent rate change is 1k hard earned dollars so its a tough decision.

I would like to hedge this trade against two things: first a further falling euro between now and mid october (if i wait for better courses) and second: a stronger euro within the next year to previous heights of 1.2 to 1.3 dollars (roughly speaking).

So here is what i need advise, if I
a) exchange the money now, are there options that i could use to harvest any higher rate between now and Oct?
b) wait with the exchange until a given date, can i buy an insurance which gives me at least todays rate in case euro goes down?
c) is there a (call) option to make sure i don't feel very sorry for having had to exchange the money so early?

If there are ways to do this, please give clear advise what to buy and how much it would cost me. I see this really more as an insurance that has a certain price.

Thanks!

 

[xandman]

You are buying a house in the US with US dollars. If buying a house is a sure thing. Anything other than immediately converting your euro to US dollars is speculation on your part since the EUR/USD conversion rate has no material impact on house prices.

You want to speculate? Hold on to your Euros.

 

[Handle123]

Since long term Euro is in major downtrend and U.S. Dollar major uptrend. But to speculate on a few months I believe is foolish and buying options can become dog chasing his tail if you are wrong as the ATM options are expensive and trade monthly, it would be plain guessing which direction it be between now and October 1 with what has been happening in Greece. And since you are not an active trader, this would most likely be a bad trade as you have no/little knowledge of what to do when to make adjustments. If it was me, I would buy the house you seek at your earliest time you can.

 

[classiccharts17]

Hello

The easiest solution is
a) to change the Euro's now and save yourself the headache of price fluctuations between EUR/$.
b) can be done through going short on EUR/$ till october for the amount of the price of the house in $. (example: house costs $108K which is EUR100K) Rate is $1.0828 for EUR1. You can short 1 Lot ($1000) EUR/$ using a leverage of 1:100. This means if the dollar goes up you will be losing on the initial saved amount in your bank EUR100 but the loss will be compensated with the gains you make on the hedge (shorting 1lot of EUR/$).

Of course if the $ goes down and the EUR goes up, you will have a limited time till you are margin called, but the loss will be compensated by your initial EUR100K in the bank that has risen in value vs the $. If your margin call is after October, there is nothing to worry about since you will close the hedge anyways once you transfer the funds to $. If it happens before October you can open a new hedge and repeat the scenario.

c) options is a possibility provided you have a good knowledge evaluating the premium and selecting the right contract that fits your situation. Probably expiring in October 2015 (buying puts)

 

[JoeJoe]

Hi,

thanks all for your inputs. Yes, exchanging now is definitley going to take away the headache. And, yes if i usually don't trade why start now.
But i like the idea of an insurance since i do not do currency exchanges (in these amounts) very often.
Classic, can yo give me a bit more detail on option b)?
- How much does the Lot cost me and what is it worth at margin call(considering different developments)? (Is margin call the end time of the option?)
- Where can i buy it (I am only setup for stocks so far)?

thanks,
Joe

 

[xandman]

Call a forex broker to execute a currency swap for the specific date that you want to convert your currency. They can give you the marketing spiel and more detailed cost information.

Then you can go back and explain it to your wife, so she thinks your a genius.

 

[classiccharts17]

Hi,

thanks all for your inputs. Yes, exchanging now is definitley going to take away the headache. And, yes if i usually don't trade why start now.
But i like the idea of an insurance since i do not do currency exchanges (in these amounts) very often.
Classic, can yo give me a bit more detail on option b)?
- How much does the Lot cost me and what is it worth at margin call(considering different developments)? (Is margin call the end time of the option?)
- Where can i buy it (I am only setup for stocks so far)?

thanks,
Joe

Option B is indeed a good insurance to fixate the price of the house in $. Xandman is right, if you contact a good FX broker and explain the situation, he will go through all the details step by step and give you the exact cost. Try to find a FX broker that does not charge you a large commission (usually they do not charge you a commission) and has a minimum spread and make the hedge during the opening hours of US market. Biggest commission i experienced was $20 per lot (per $1000) but since you are not trading i think $20 commission and a wider spread is not such a big deal. My recommendation would be FXCM, CMC markets, London Capital group or OADNA. All have a good reputation. Good luck!

 

[OTM-Options]

IMO ...... In your case all you need to do is convert the funds into USD at your bank. No options, no FX broker, no currency futures, no BS - just a simple EUR to USD exchange.

Check with your bank on the exchange rate, the % difference between the buy/sell. I'm charged 2.5% for a CAD to USD exchange - EUR to USD might be cheaper.

 

[Handle123]

IMO ...... In your case all you need to do is convert the funds into USD at your bank. No options, no FX broker, no currency futures, no BS - just a simple EUR to USD exchange.

Check with your bank on the exchange rate, the % difference between the buy/sell. I'm charged 2.5% for a CAD to USD exchange - EUR to USD might be cheaper.

I totally agree, in couple months time could change $15,000 one way or other, using options on both sides going to cost thousands to buy the options to do couple months of hedging especially since you don't trade these as a living, or if currency don't move you be losing on the options from time decay. Just easier to change over to dollars now and not worry over it, regardless if US Dollar goes up or down, it still going to buy house which isn't pegged to currency trends. Think the wife be happy with less stress and not risking.

Good luck.

 

[FCXoptions]

Maybe convert half now and the rest later. Then you can only be half mad at yourself . Either glad you went ahead and exchanged half or glad you waited on the other half...or it might just stay the same rate.