Hedging / forward contract

[Countdown]

We need to make 3 payments of $15k per annum for the next three years.

Is it worth taking out some sort of protection against adverse currency movements and, if so, what's the best way?

Any advice appreciated

[marky1]

I don't think it would be worth it, especially with the rate where it is at the moment. If I had to bet I'd say in three years time more likely to be 1.50+ than 1.35 or lower, but who knows hey! To actually hedge it today for a payment three years in the future will cost a good few %, just can't see the point.

[Ozzie Osmond]

Are you in a position to buy the whole lot now and stick it in a $ account? Or just pay the whole lot now? With interest rates this low the "cost" of sidelining the cash is not very great.

[Countdown]

Ozzie Osmond said:

Are you in a position to buy the whole lot now and stick it in a $ account? Or just pay the whole lot now? With interest rates this low the "cost" of sidelining the cash is not very great.

We could pay the whole lot now but not sure how we would "store" it. We don't have a dollar account.

[ellroy]

Most banks should be able to set up a US$ account for you easily enough.

The cost of hedging at that kind of value is pointless, the contract will cost an arm and a leg in comparison. The simple way to remove future risk on this is, as has been said, to park the money in US$ now and forget about it until you need to make the payments. Theere may be some interest on the account, although I'd be surprised, most foreign currency accounts are non interest bearing.

[Condi]

Plus the forward rate for 3 years away is likely to be quite a few points worse than the spot. You'll lose a few hundred in that alone.

[Countdown]

Thanks all

I've done some rough calculations and it's not going to be worth it. We've put a 5% collar in the contract (so we'll stand any negative movement up to 5%). That seems the easiest option.

[Cockey]

Could always open an CFD account with someone like IG and buy $15k. Margin (deposit) required would be around £500 plus some more to cover financing (Libor-ish) and any running loss you experience.

If you close out the position when you buy the real dollars with your bank then the p/l on the trade will have hedged you. The cost of the exercise will be the financing of about $14.250 over the period the trade is open.