Turbulent times for the Pound How you can protect your rate

11 July, 2016

Matthew Boyle

Over the past few weeks we have seen the pound struggle following the Brexit vote, and at present the impact of this vote is still being felt, with ecostats having little impact whilst all the while the Pound seems almost in freefall.
Given data is having such a small impact on the market, and analysts are warning of further drops in GBP rates I thought I would focus this week on how Currency Index can help you protect your rate using a forward contract, and how that can benefit you.

That said we do have a really major piece of data this week on Thursday as the Bank of England release their minute and interest rate decision. Last week Mark Carney hinted at an Interest rate drop in the UK, and some are suggesting that it could be as soon as this Thursday when this is announced. If so this will certainly spell further weakness for the pound and rate drops across the board as foreign investors get less return for their money and so look elsewhere to invest. This provides even more reason at present to consider the below if you have any upcoming Currency requirements.

What is a forward contract?
Forward contracts can help you to reduce the risks of fluctuations in the currency markets. You can lock in an exchange rate for a specific amount of currency with a forward contract so that you can use it at a later date, without having to use working capital.

If you are in the process of purchasing a property overseas you may like to consider how you might protect yourself against changes in foreign exchange rates and other foreign exchange risks. A small variation in the rate could cost you thousands of pounds if not managed properly. Our years of experience help to protect your bottom line.

How does a Forward Contract work in practice? ( please note the figures and currency pair are used are an example)
Imagine you are purchasing a property worth 140,000 Euros in 3 months’ time. Based on a GBP/EUR forward exchange rate of 1.15 you have determined that will cost you £121,739.13 GBP, meeting your budget. However, GBP might weaken against EUR during that period to a rate of 1.10, meaning that your cost would increased to £127,272.73 GBP

In this case, if you booked a forward contract with Currency Index you would have been able to secure the exchange rate of 1.15, fix the cost and avoid any unexpected impact on your budget. Of course, you would lose out if GBP strengthened against EUR, but exposing your purchase to currency risks may have a more significant effect – in some cases could even mean the property becoming out of budget. Whereas if you buy forward you can guarantee an exchange rate based on when you order the currency.

Currency Index forward contracts can also provide flexibility enabling you to take delivery of your purchased currency in part or in full at any time between the contract date and maturity date.

How do I book a forward contract?
To book a forward contract you just need to tell us the amount and the currency you would like to book, and also the date you would like to book the contract to. You pay a 10% deposit at time of booking and then the balance on or before the date set. There is no penalty for early settlement of the contract. The exchange rate you will achieve does depend how far forward you book – the further forward you go the lower the rate.

What happens if my property purchase falls through?
If your purchase falls through, or something goes wrong there are two options in regard to the forward contract and the Euros that have been secured.

1. Settle the contract and keep the Euros for use at a later date. This could either be for a later Euro purchase or can be kept on account when timing favours option 2.
2. Sell back the contract/ Euros. We can sell the Euros back to GBP if you are not in a position to complete on the contract. The sell-back rate, and amount of GBP returned would depend on the market rate at the time. Any loss would be taken from the deposit, but should rate we sell at be below where we bought you would then be in profit and this returned to you.

Speak to your Currency Index broker today for some friendly and professional guidance on how to get the most out of your transfer. Currency Index can help you stay well informed and well ahead of the markets.