Take advantage of sterling near a six-year high

Take advantage of sterling near a six-year high

The strong pound is really driving the overseas property market and there has rarely been a better time in recent years to purchase a property abroad. Alastair Archbold, senior FX Broker explains how to make the most of the exchange rates.

We are currently enjoying exchange rates within a few per cent of the best they have been in six years. In real terms this means a €250,000 property overseas now costs a staggering £20,000 less than last summer, purely due to exchange rate movements.

Despite the good pound/euro exchange rate however, it has failed to go any higher in recent months. In light of this, it's an opportune moment to look at the tools and contract types a specialist currency broker can provide, to help save you money when buying overseas.

Tools to help you take advantage of the best exchange rates

Using a currency broker as opposed to your bank can save you thousands of Pounds simply by achieving better exchange rates. This is only part of the story however, as a specialist broker has various tools available that can help you take advantage of the current rates even if you don't need your currency for some time. There are also ways to protect you against adverse exchange rate movements.

Spot Contract

The Spot Contract is the most basic and commonly used foreign exchange product. It is an agreement to buy or sell one currency in exchange for another. You have two days to settle the contract, at a price based on the prevailing "spot exchange rate" (the current value of one currency compared to another.) Although a Spot contract lets you buy or sell currency as you need it, exchange rate movements are highly unpredictable, even during a single trading day. Upon receipt of cleared funds currency is available for onward transmission. This type of contract is typically used for paying an initial deposit for a property, or to top up your account overseas to pay bills.

Forward Contract

A Forward Contract lets you buy or sell one currency against another, for settlement up to two years into the future. Unlike spot contracts, a forward contract eliminates the risk of fluctuating exchange rates by locking in a price today for a transaction that will take place in the future. Most importantly it protects you from unfavourable movements in the market, however, be aware that it will not allow for gains to be made should the exchange rate move in your favour during the period between entering the contract and final settlement for the currency.

This type of contract is very popular when buying overseas, as usually there is a time period of a few months between paying your deposit and completing your final balance. It allows you to budget as you will know the total GBP cost of your purchase, and protects you against rates falling. For example, you could fix an exchange rate today for £200,000 to euros, and only lodge 10 per cent of the total funds to be converted (£20,000) while the majority of your funds remain earning you interest. You wouldn't buy a property in the UK without knowing the final price, and the same should hold true when buying overseas.

Stop Loss Order

A Stop Loss order protects you against adverse exchange rate movements and secures your currency if it falls below pre-agreed level. This gives you a safety net and 'worst case scenario' and doesn't leave you exposed to a falling market. This is useful when the exchange rate is rising. For example, at the time of writing, the trading level is 1.25. You place a 'Stop Loss' to convert your funds should the rate drop below 1.22. In this way you to take advantage of any gains, without leaving yourself open to unnecessary loss should the market move against you, and you know the absolute minimum you will have to spend.

Limit Order

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. This type of contract is particularly useful when the markets are moving in a positive direction for you. This type of contract can be using if you are targeting a specific rate, and can be used in conjunction with a Stop Loss order.

Alastair Archbold (Senior FX Broker, Foremost Currency)

(This article was first published in A Place in the Sun Magazine Winter 2014 issue 120)
A Place In The Sun