Hedging foreign currency credit?

T

tomkit66

Hello everybody,

maybe someone can give me a hand on this:

I have a EUR 300.000 credit with a local bank where I have to pay 6% per year on interests for the next 20 years. Well, this is a secure and stable but very expensive way and our banks do offer credits in foreign currencies like the swiss franc and japanese yen as well.

The Jap. YEN credit costs about 1,75% per year and someone
only pays the interests while the part for the capital payment goes into a life insurance or a fund for the whole life time of the credit.

So I thought about ways to minimize my currency risk with options and/or futures contracts. Unfortunately none of our local banks offers something like this, they only say this can´t be done or it´s far too expensive.

I am not a financial expert but my feeling tells me that there should be a way to limit and hedge the currrency risk with some of the saved and remaining 4,25% (6 - 1,75) interests!

Am I right? Can this be done without getting too expensive?

When I think about what happens when the jap.YEN increases let´s say 10% that would mean that my credit goes up to EUR 330.000, how many options would I have to buy to equalize EUR 30.000?

Thanks in advance for any help or hints where I can get the needed informations or advise how to do the maths!

Tom K.
Europe

 
beware of foreign currency credits with lower interest rates to save on interest payments in your home country with higher interest rates, I'm aware of the fact that a number of crooks in europe are trying to sell them by marketing the low interest rates in japan etc, but with all costs and risks factored into the equation the cost/ benefit analysis shows zero practicability:

1: no bank will pay out the full sum, something like 5 - 20% will be retained as collateral, plus you'll have to pay exchange fees, etc etc, plus, most important, you'll face the full foreign exchange fluctuations...

2: if you do 1 plus decide to hedge the credit your total long term costs will not be much lower than your credit @ 6% for 20 years, afraid that's about as good as it gets.

there is no such thing as a free lunch - either you try and benefit from interest differences, then you have the risk of currency fluctuations which can end up costing more, or you hedge and then the benefit disappears...

if you want to speculate on currencies the most effective approach is a directional bet via currency trading, either futures, or directly in the cash markets (much more liquidity than derivatives markets), there are a number of firms that allow you direct access, but forget about forex credits.

cheers
 
Hedging can be accomplished by purchasing or booking different types of contracts that are designed to achieve specific goals. These goals are based on the level of risk the customer is exposed to and seeking protection from and allow the individual to lock in future rates without affecting, to a great extent, their liquidity.
 
There is no free lunch... There is a multitude of reasons and issues, which imply that you won't likely be able to do what you're trying to do efficiently.
 
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