When buying a property abroad, or indeed for any large currency transaction where the payment date is some way off, you need to consider the impact that an adverse exchange rate movement could have on your costs. For example, a property costing €200,000 would have cost £148,345.94 on 14th February 2008. Just two months later on the 14th April 2008, the euro had risen in value against the pound and the same property would cost £159,795.46 - nearly £11,500 more, or 7.72%. Of course, the exchange rate could move in your favour but it is a risk you may not want to take. The MSN Currency Service offers you a variety of options giving both the certainty of knowing exactly how much it is going to cost you by fixing the exchange rate from the outset and the flexibility of a timeframe to suit your needs.
Please note: The exchange rates and dates used in the examples are for illustration purposes only.
Forward Contracts - a simple way to fix the exchange rate
The technical term for fixing the exchange rate for a date in the future is a Forward. It means you can fix the exchange rate today on a transfer you intend to make at a later date. This type of transaction can be particularly important for buying an overseas property when the final payment is not due for several months but you need the certainty of how much the foreign currency is going to cost you in sterling. Forward contracts can be anywhere between three working days and two years ahead. You will be required to make a deposit of typically 10% of the value of your transaction when you place your order. The balance is then payable a few days before the settlement date.
For example, the final cost of your new French apartment is €200,000 and you will need to pay the developer in 5 months' time.
You have calculated the amount in Sterling at today's exchange rate and decide that the current amount is very close to your available budget. With this in mind you make a 10% deposit and place a Forward contract to avoid the risk of any adverse currency movements, so that the cost of the apartment will not unexpectedly rise above your budget. You are quoted a rate of €1.2400 which you accept and the deal is confirmed immediately.
You are now safe in the knowledge that whatever happens to the exchange rate, the amount you owe is fixed. All that remains is for you to forward the balance to the MSN Currency Service on the payment date so the €200,000 can be sent to the developer on time.
