Buying a Currency Option GBP/EUR

[bosshog]

Ok I know bugger all about market financial matters. However we want to move back to the Uk from France. This means our house is currently on the market. Now it seems (to my mind) that the EUR is going to weaken significantly more against the pound in the next year or so and I do not know how long it will take to sell the house.

So I'm fairly convinced of buying a currency option this week to cover this. The amount is going to be around 300K. I'm thinking I putting a fair amount (say 50K) into the option.

Good/bad idea? Advice?

thanks

[voicey]

Buying an option is going to be very expensive.

An alternative would be to fixed your rate forward for say 22nd Aug. If the house completes on 22nd Jul you can transact an FX swap to move the date of fx exchange from Aug to Jul. If the house is not sold by 22 Aug you can roll the contract forward (with an FX swap). This is all done with no upfront cost but you are obligated to trade and the rate you get will change slightly as the dates are moved around.

[bosshog]

voicey said:

Buying an option is going to be very expensive.

An alternative would be to fixed your rate forward for say 22nd Aug. If the house completes on 22nd Jul you can transact an FX swap to move the date of fx exchange from Aug to Jul. If the house is not sold by 22 Aug you can roll the contract forward (with an FX swap). This is all done with no upfront cost but you are obligated to trade and the rate you get will change slightly as the dates are moved around.

thanks voicey - doing some googling:

Looking at http://www.currenciesdirect.com/business/forward-c...
that reads essentially what I thought a current option was. Hmm confused.

If I do the FX swap - will have have to take the rate on that day?
Can I for example do a forward rate for say May 2013, and if I sell before just keep the cash in a EUR account until the period end as I don't when it will sell?

I presume the rate isn't going to be as good as an option? Or just an option just give me 'the option' to use or not so as long as I can cover the option? (is that the only difference?)




thanks!

Edited by bosshog on Tuesday 22 May 09:15

[voicey]

The link you posted was to FX forward trades, not a currency option.

EURGBP is currently trading at 0.8090 and 3M forward points are 9. In plain english that means you can agree to sell €100k in 3M time at a rate of 0.8099 (and received £80,990).

If in 2 months time you were ready to complete and the spot rate had moved to 0.7900, with 1M forward points at 2 you could do the following FX swap trade...

a) sell €100k value spot at 0.7900 (receive £79,000).
b) buy 100k 1M forward at 0.7902 (pay £79,020).

So on completion you have sold your EUR at 0.7900 but you would receive a further £1,970 in a months time which would bring your effective to rate to 0.8097.

This is how large companies manage their exposure to FX.

[davepoth]

Are you intending to sell to British people? if so, could you price in Sterling?

[cayman-black]

Speak to these guys www.smartcurrencyexchange.com
I have dealt with them for about six years and they are very efficient.