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Managing property investment currency risk
Monday, 01 February 2010
When investing in property abroad, you should take care to manage your exchange rate risk appropriately, since currency fluctuations can have a significant impact on the overall success of your real estate investment.
Not only is it important to get a great deal on the initial exchange rate that you transfer your local currency at in order to purchase the foreign property, but subsequent exchange rate changes often require management or hedging in order to minimize risks and maximize returns.
The following sections cover some straightforward methods for managing your property investment currency risk efficiently.
Shop around for the best exchange rate when buying property abroad
A key thing to remember when making the initial currency transfer for an overseas property purchase is that you are generally not locked into using your local bank for foreign exchange transactions and forward contract hedges.
This means that you can shop around among various banks for the best forex rate, which can often save you as much as 1-2% on your currency transfers. You can also use reputable currency transfer providers like OzForex, who work hard to make sure that all of your currency transfers will be both cost effective and straightforward to perform.
Furthermore, not only can you shop around for the best exchange rate on your large initial property deposit, but you can also get better exchange rates on your regular currency transfers if you plan on making periodic mortgage payments in a foreign currency.
Placing currency limit orders
Placing a limit order with your foreign exchange provider is another way to help you get the best exchange rate on your property-related currency transfers.
When you enter a limit order, you will need to specify an exchange rate level, a currency pair, an amount of one currency and whether you wish to buy or sell that amount at that level.
If the market exchange rate subsequently fluctuates to your specified level, then your foreign exchange provider will buy or sell the specified amount of currency for you automatically based on your instructions.
Limit orders are especially helpful because people cannot be watching the actively fluctuating foreign exchange market all of the time, and so they might miss out on a short lived exchange rate improvement. Although limit orders are often used when dealing through stock brokers, this useful ability is rarer among foreign exchange providers. Be sure to ask whether your currency transfer provider offers limit orders if you think you might wish to use them.
Managing currency risk from foreign property investment with forwards
Most real estate investments have a fairly long time horizon. As a result, people who invest in property abroad typically tend to manage their long term currency risk by using forex forward contracts as a hedge against adverse exchange rate movements.
These contracts permit you to lock in a market-determined exchange rate for a certain amount of currency and a given future delivery date. The forward exchange rate you receive is related mathematically to the prevailing spot rate and the current interest rate differential between deposits in the two currencies involved in the transaction.
Forward contracts can be used as much as two years in advance of when you anticipate actually needing the foreign currency to make payments related to your foreign investment property.