Buying FEX Call Option as Euro risk insurance

[LACHLANC]

A simple alternative I haven't seen mentioned is taking out a FX Forward for tge amount of your expisure. You simply contract to sell USD & buy EUR at a future date and this effectively locks in current currency cross rates after adjusting for any difference in the 10 month swap rates for the two currencies & transaction costs. I have done this and it shouldn't be too hard to arrange with a decent bank (as with any financial transaction you aren't familiar with, check the fwd rate with someone you can trust who knows how to calculate them to ensure you aren't being ripped off).

[blueazimuth]

When you signed the contract, you were happy with the price. Put your dollars into a Euro account, pour a glass of whiskey, toast your new boat and don't sweat the small stuff. As the song says, there'll be time for that when the dealing's done ...

[GAP]

If your funds are already liquid, consider asking Lagoon if they offer an early payment discount.

Note: this assumes you're 100% confident they are financially solid. You never want to prepay a company that is shaky. If they go under, you become an unsecured creditor at the back of the line.

[Drew13440]

Originally Posted by GAP

You never want to prepay a company that is shaky. If they go under, you become an unsecured creditor at the back of the line.

I agree with this and will add that pre-paying removes the buyer's leverage with the builder. If the job is not done right or not done on time, there is nothing in the world the buyer can do about it but wring his hands.

[svlamorocha]

Originally Posted by LACHLANC

A simple alternative I haven't seen mentioned is taking out a FX Forward for tge amount of your expisure. You simply contract to sell USD & buy EUR at a future date and this effectively locks in current currency cross rates after adjusting for any difference in the 10 month swap rates for the two currencies & transaction costs. I have done this and it shouldn't be too hard to arrange with a decent bank (as with any financial transaction you aren't familiar with, check the fwd rate with someone you can trust who knows how to calculate them to ensure you aren't being ripped off).

I did not mentioned forwards because they are not exchange traded, hence you need someone to "put it together" for you and the spreads I have seen for this sort of sum are huge, way over 2%. Given that short-term riskless interest rates are very low both in EUR and USD it appears that the most practical solution is just to buy EUR spot at low spread (Schwab or Oanda) and hold physical EUR in a bank account until closing.

Citi use to offer free EUR accounts to Yanks out of the UK subsidiary (Citibank Personal Banking International) that has a branch in London.

[LACHLANC]

Originally Posted by svlamorocha

I did not mentioned forwards because they are not exchange traded, hence you need someone to "put it together" for you and the spreads I have seen for this sort of sum are huge, way over 2%. Given that short-term riskless interest rates are very low both in EUR and USD it appears that the most practical solution is just to buy EUR spot at low spread (Schwab or Oanda) and hold physical EUR in a bank account until closing.

Citi use to offer free EUR accounts to Yanks out of the UK subsidiary (Citibank Personal Banking International) that has a branch in London.

That was why I suggested " as with any financial transaction you aren't familiar with, check the fwd rate with someone you can trust who knows how to calculate them to ensure you aren't being ripped off ". For an amount of a few hundred thousand, with appropriate advice the cost should be close to wholesale mkt costs.

Whether it's fwds or converting USD to EUR now, I think avoiding paying a premium to go long options is important. As someone else said, if you were ok with the original price lock it in and don't introduce currency trading/speculation to the transaction.

[daletournier]

Originally Posted by blueazimuth

When you signed the contract, you were happy with the price. Put your dollars into a Euro account, pour a glass of whiskey, toast your new boat and don't sweat the small stuff. As the song says, there'll be time for that when the dealing's done ...

Everything other than this is gambling, there's a variety of potential issues, as you mentioned US geopolitical problems but there's also European banks bad debts etc, so who knows what will happen and where? If you were happy with the price put the money in some escrow arrangement and count down the days.

[svlamorocha]

Originally Posted by LACHLANC

That was why I suggested " as with any financial transaction you aren't familiar with, check the fwd rate with someone you can trust who knows how to calculate them to ensure you aren't being ripped off ". For an amount of a few hundred thousand, with appropriate advice the cost should be close to wholesale mkt costs.

Whether it's fwds or converting USD to EUR now, I think avoiding paying a premium to go long options is important. As someone else said, if you were ok with the original price lock it in and don't introduce currency trading/speculation to the transaction.

The bit that you have but I am missing is where to get (as a consumer vs treasury of a large corp) a decent quote for currency forwards for the date you need, and how to handle collateral. Do you know of any institution that will do it for a few hundred thousand $ for a consumer a a decent spread and let you post investments you already have as collateral? That will be VERY useful for US folks buying French boats in Europe..

Thanks in advance

C

[LACHLANC]

Originally Posted by svlamorocha

The bit that you have but I am missing is where to get (as a consumer vs treasury of a large corp) a decent quote for currency forwards for the date you need, and how to handle collateral. Do you know of any institution that will do it for a few hundred thousand $ for a consumer a a decent spread and let you post investments you already have as collateral? That will be VERY useful for US folks buying French boats in Europe..

Thanks in advance

C

svlamorocha - I won't offer any advice, what I will do is explain how it works and what I did a while ago and interested parties can then do their own follow up to see if they might want to do something similar in future.

I wasn't buying a boat but the transaction was effectively the same as what has been described in this post. I will adjust the currencies and amounts so it's more relevant to this series of posts.

I wanted to move funds of USD400,000 from USD to EUR in 12 months time but I wanted to lock in the price now. Let's say the quoted current (spot) rate is 1.1823 (this would equate to bid & offer rates in the wholesale mkt of 1.1822 & 1.1824 respectively). For a transaction of USD400k I wouldn't expect rates to necessarily be this close but in this example I would expect them to be within 1.1818 & 1.1828 [= a bid/offer spread of +/- 0.04%]. I approached the large global bank I banked with and asked them if they could do this transaction and what the quote/costs would be. I was told they could do it and they gave me a quote which I judged it to be what I considered a very poor quote and I asked to speak to their treasury section to obtain a better quote [my original problem was I spoke to a branch officer who didn't know much and he gave me a retail rate that was for smaller transactions]. I found that once they know that I knew where the wholesale rate was and that I knew how to calculate what the approx. fwd rates should be I obtained a far narrower bid/offer spread [= lower cost]. At the completion of the Fwd transaction I made a profit/loss on the Fwd transaction that approx. offset the Loss/Profit on selling USD buying EUR in 1 yrs time which is what I both expected and wanted.

Note: Before entering any Fwd transaction you also need to know that you can unwind the transaction or roll the transaction if required and you also need to know how the USD funds are transmitted to the desired EUR recipient.

Note: Forward rates are primarily a function of the current (spot) rate and the separate swap rates for the term of the forward for the two currencies. In the case of USD & EUR the US 1yr swap rate is higher than the EUR 1yr swap rate so the 1yr fwd rate needs to account for the fact that you will have cash funds in USD earning a higher return than in EUR but the Fwd Currency Swap gives you the EUR currency exposure. If we "pretend", for ease of calculation, that the difference in the two 1yr swap rates is 2%, the 1 yr fwd rate for USD to EUR needs to be approx. 2% lower to offset the fact that you earn 2% more by earning USD swap rates while you have EUR exposure.

For my transaction I brought all of the above together and it meant that I could either lock in USD400,000 to approx. EUR338,200 now [but I would need somewhere to deposit the Euro funds which I didn't have] or I could do a fwd contract USD400,000 to EUR for 1yr and USD400,000 would give me approx. EUR331,400 and during the one year period my funds in USD could earn approx. 2% which equals USD8,000 which equals approx. EUR6,800 [which is the diff b/w the current EUR amount and the Fwd EUR amount].

Please note that all I have tried to do above is give a feel for what I did which was the easiest thing for me to do without having to open up foreign currency accounts. I have worked in currency markets so it was easy for me to follow & calculate where levels should be but for others it will be different. I wasn't in the USA and it may not be easy to do this in the USA. For me it was very clean & simple and it worked - any individual needs to obtain their own advice and I also strongly recommend they also understand what is occurring and what could occur to ensure they are understand all risks.

[Dockhead]

The option (forward contract, currency swap, whatever) is a good way to do it. Your loss is capped at 3% (if that's what it costs; sounds about right to me), but if the Euro falls, you will start getting your money back, and start being ahead pretty soon.

It's true that there have not been big swings in the last couple of years, but that does not mean they can't happen over the next almost year. We see swings of 20% and more from time to time and I would not, personally, be willing to hang my butt out on that kind of money.

The other way to do it is to buy euros now and into some short term instrument, but interest rated over here are so low that you won't get anything out of that. And you lose any upside in case the Euro drops.

In my opinion, the option is the smart way to do it.

[LACHLANC]

Originally Posted by Dockhead

The option (forward contract, currency swap, whatever) is a good way to do it. Your loss is capped at 3% (if that's what it costs; sounds about right to me), but if the Euro falls, you will start getting your money back, and start being ahead pretty soon.

It's true that there have not been big swings in the last couple of years, but that does not mean they can't happen over the next almost year. We see swings of 20% and more from time to time and I would not, personally, be willing to hang my butt out on that kind of money.

The other way to do it is to buy euros now and into some short term instrument, but interest rated over here are so low that you won't get anything out of that. And you lose any upside in case the Euro drops.

In my opinion, the option is the smart way to do it.

With respect there are major differences between an outright transaction, whether current (spot) levels or in the future (fwds), and between paying a premium for an option. An outright transaction effectively locks in the current rate for little cost. A long option will involve paying a material amount in premium to buy the option.

I agree with what others have already stated in that this should be about finding the best way to transfer USD to EUR rather than looking for a way to introduce a costly element of currency speculation (unless the original poster wants to speculate, in which case I would suggest choose different currencies at different time frames and you can trade currencies for years to come).

[svlamorocha]

Originally Posted by LACHLANC

WA long option will involve paying a material amount in premium to buy the option.

+1
The exchange-traded option that was mentioned is close to useless because it matures way before closing date. It is cheap because it is not long enough...

[Perna]

We had a similar situation when buying a house in Greece.We opened an Euro account with our bank, (not sure if that is possible where you are) and then bought euros in largish amounts when we thought the rates were attractive. It's always worth bargaining on the phone as well, as a previous poster said,

This allows you to take advantage, or not, of any long term wisdom out there. There are plenty of banks and experts making educated predictions for the exchange rates, depending on how they see the long term future of the US vs Europe. The UBS house-view is one for example. If they are all predicting in one direction, then you could buy mainly sooner or later accordingly.

The other thing is that there are not insignificant short term changes, depending on whether Trump is on a roll or Merkel coughs, or North Korea fires another rocket. There will be plenty of these over the next year, so really I think you are in a good position to take advantage of them. Even if it's only a couple of percent overall.

I would look at the freedom of having a year to buy euros as a positive thing, unless Mr Murphy is normally your best buddy of course.