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New currency options on overseas properties
Once the preserve of large corporations, World First is the UK’s first currency broker to offer currency ‘options’ to its private clients...
Once the preserve of large corporations, World First is the UK’s first currency broker to offer currency ‘options’ to its private clients.
Currency options protect clients if the exchange rate moves against them but also allow them to benefit if the rate moves in their favour. This new service offering is particularly attractive to people buying or selling property abroad.
Until now, there were only two ways to manage your exchange rate risk when purchasing or selling an overseas property. For example of Mr and Mrs Smith are completing on a property in France in three months time and they can use:
1) The un-hedged method: The Smiths exchange sterling into euros at the prevailing rate in three months’ time when they need to make a euro payment to pay for the property. In this scenario, they are exposed to the £ / € rate weakening but benefit if the rate improves.
2) The forward contract: The Smiths fix the exchange rate for the completion date with a forward contract. This enables them to fix the sterling cost of the house they are buying and protects them if the £ / € rate weakens. However, they are unable to benefit if the rate improves.
World First can now offer a third alternative:
The protection option: This product protects the Smiths from the £ / € rate weakening by providing them with a worst case exchange rate, like a forward contract, but also allows them to take advantage if the rate improves.
How does a protection option work?
A protection option combines all the advantages of entering into a forward contract with all the advantages of remaining un-hedged. It provides a guaranteed worst case rate (like a forward contract) but also allowing the holder to benefit from any favourable exchange rate move (like remaining un-hedged). The holder fixes the protection rate (the worst case rate), the amount to be transferred and the date when the transfer will take place.
There is an up-front cost (premium) to pay when you buy a protection option which is governed by three factors: the price of the property, where the protection rate is set and the completion date.
Nick Robinson, director, said, “It is really exciting to be able to offer protection options to our private clients as they can have such a positive impact on their house purchase or sale. Having a service like this at their disposal helps our clients budget whilst also leaving them open to benefit should the rate move in their favour.
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