Any questions: Currency - September 2011

Wednesday, August 31, 2011

Any questions: Currency - September 2011

Contracts to help guarantee a good rate

We've paid a deposit on a property in France and have two months until we need to pay the balance of €175,000 at the notaire's. I've heard of Stop Loss and Limit orders; how could these be of use in our situation, how do they work and what are the benefits?

A Stop Loss order will protect you against adverse exchange rate movements and secure your currency if it falls below a pre-agreed level. The other type of order you mention is a Limit order, which is placed at the top end of the market to secure currency at a specific price that may not be currently available.

In your situation, these types of orders can be used to help you achieve the best possible exchange rate within your two-month timeframe. In the last month alone, the exchange rate to buy euros has fluctuated by over five per cent, meaning the cost to purchase €175,000 has been between £152,000 and £160,000 - a remarkable £8,000 difference in just a few weeks. This clearly illustrates how much the cost of your property could fluctuate while waiting to complete the purchase. Of course leaving things to chance could mean your property costs many thousands more than necessary. You could place a Stop Loss order to purchase your currency should rates fall below a pre-agreed level of, for example, €1.12. You then have a safety net should rates drop away, and a worst case scenario of what your property will cost you.

At the same time, you can place a Limit Order to purchase should rates improve, for example to €1.17. This way you know within a set range what your euros will cost you and should the problems in the EU continue and £/€ rates improve, you can take advantage of any gains without leaving yourself exposed to deterioration in the rate.

The other option is to wait until you need the funds before transferring them to the notaire. Of course, this way you won't know what the rate will be on the day you make the transfer and should the market move against you this could increase the cost of your property. Stop Loss and Limit Orders allow you to take control of the markets, rather than letting the markets control you, and potentially means your euros cost thousands less than simply leaving it chance.


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