USD v sterling buying a rate
Discussion
My business gets paid in dollars, current $v£ is VERY much in my favour. I get FX brokers calling me frequently, I want to lock in a rate for the next 6 months which I assumed would cost me a fair lump of money. The brokers are saying I can do this at no cost and I just give them an estimate of how much I think I might trade over say a 6 month period.
Any observations or obvious pitfalls?
Any observations or obvious pitfalls?
It sounds like what they are talking about is a hedge. If you google hedge Fx with futures I am sure there will be stuff out there.
In essence you would buy a gbp futures contract (s) to cover the exposure you want. If the gbp was to recover massively then that affects what you are getting paid by your clients, but you make money on the futures contract. If the gbp continues to plummet then you continue to profit on what you get from clients but lose on the hedge.
In affect you are locking in the rate now, regardless of where it goes for the duration of your hedge.
I have never actually done this but have worked in and around Fx markets for the last twenty years Perhaps someone with some direct experience could add more.
In essence you would buy a gbp futures contract (s) to cover the exposure you want. If the gbp was to recover massively then that affects what you are getting paid by your clients, but you make money on the futures contract. If the gbp continues to plummet then you continue to profit on what you get from clients but lose on the hedge.
In affect you are locking in the rate now, regardless of where it goes for the duration of your hedge.
I have never actually done this but have worked in and around Fx markets for the last twenty years Perhaps someone with some direct experience could add more.
Thanks, yes I thought I needed to "buy" the rate. The FX operation I normally deal with is saying I can do this without cost....which to my mind is to good to be true hence my suspicions......I would not get advantage of sterling dropping further but I have all my accounts based around a 1.40 average........so getting anything in the 1.20's is a big plus.
Couple of things - you need to be clear whether you are buying an option to buy a certain amount, or a future where you are committed to buying a certain amount.
The 'cost' will depend on which of those it is, and what the actual rate you are locked in at will be. It is perfectly possible for this arrangement to be zero (up front) cost, but that will affect the rate and commitment.
It's a (little) bit like when you exchnage holiday money and they advertise no commission. That bit might be true, but the rate you get is adjusted to take into account the fact that are not paying an explicit commission.
The 'cost' will depend on which of those it is, and what the actual rate you are locked in at will be. It is perfectly possible for this arrangement to be zero (up front) cost, but that will affect the rate and commitment.
It's a (little) bit like when you exchnage holiday money and they advertise no commission. That bit might be true, but the rate you get is adjusted to take into account the fact that are not paying an explicit commission.
Joe Strummers Guitar said:
ok, so I am getting the FX guys offering effectively a teaser rate and when I then say ok I expect to trade say $250K in the next 6 months they then will say ok we can actually only do "this" rate.
No, they will give you a rate. You say that you intend to trade 250K.....so they say, they will allow you to trade 250K at 1.29 before the end of August. Now, that guarantees you will be positive to your budget. But if you buy 100K next week at 1.29, they will make a profit because they only need to pay 1.24. If you buy another 150K in July at 1.29, they may make a profit or they may make a loss depending on what the rate is at that time. They will 'price' the rate based on a probability that they will make money. But they might not.The main benefit to you is the 'guaranteed' rate which you can then lock into your financials.
Sheepshanks said:
We did this a few years ago and it went quite badly against us as the pound weakened, which was annoying. Having said that we had a 'board meeting' this week and we're thinking of doing it again.
Agreed there is a possible downside but I struggle to see sterling below 1.20 ( twice in like 50 years I think it has dipped ) so mid 1.20-1.30 strikes me as a reasonable position. If the pound recovers it will go back around the 1.30's-1.40's I think. Anyway thanks everyone for the input.Joe Strummers Guitar said:
Sheepshanks said:
We did this a few years ago and it went quite badly against us as the pound weakened, which was annoying. Having said that we had a 'board meeting' this week and we're thinking of doing it again.
Agreed there is a possible downside but I struggle to see sterling below 1.20 ( twice in like 50 years I think it has dipped ) so mid 1.20-1.30 strikes me as a reasonable position. If the pound recovers it will go back around the 1.30's-1.40's I think. Anyway thanks everyone for the input.I have clients fixing their USD salaries (but a few who don't too) and I request a 5% deposit when the rate is fixed for six or more months at a time. The deposit is then paid back to them with their final payment in the series, or kept back if they are fixing again.
In addition to the amount involved dictating the rate I also ask clients how many payments out of the bought currency they intend to make during the fixed period, as I get charged by my guys for each payment the client wishes to make. For example, a client may wish to send their salary to just their own account monthly or make two payments monthly to own account and elsewhere.
In addition to the amount involved dictating the rate I also ask clients how many payments out of the bought currency they intend to make during the fixed period, as I get charged by my guys for each payment the client wishes to make. For example, a client may wish to send their salary to just their own account monthly or make two payments monthly to own account and elsewhere.
I buy and sell usd as part of my business - I use a Barclays system and can trade forwards up to 2 years in the future, deposit free.
in your case, if you want to sell USD forward, this will currently be at worse rate than spot (this is a function of the difference in forward interest rates between the usd and gbp).
On the positive side, you could take advantage of the current levels by selling your expected future cashflows forward.
in your case, if you want to sell USD forward, this will currently be at worse rate than spot (this is a function of the difference in forward interest rates between the usd and gbp).
On the positive side, you could take advantage of the current levels by selling your expected future cashflows forward.
isleofthorns said:
I buy and sell usd as part of my business - I use a Barclays system and can trade forwards up to 2 years in the future, deposit free.
in your case, if you want to sell USD forward, this will currently be at worse rate than spot (this is a function of the difference in forward interest rates between the usd and gbp).
On the positive side, you could take advantage of the current levels by selling your expected future cashflows forward.
Yes thats what I want to do, I know my contractual fixed income and want to take advantage of what I perceive to be a very good rate ( that said I sterling dropping again this morning )in your case, if you want to sell USD forward, this will currently be at worse rate than spot (this is a function of the difference in forward interest rates between the usd and gbp).
On the positive side, you could take advantage of the current levels by selling your expected future cashflows forward.
isleofthorns said:
talk to your bank and see what forward FX facility they can offer you.
Alternatively, there are lots of fx companies, but they tend to offer only short-term forward contracts, usually under 6 months in my experience
Yeah just tried this with my bank HSBC.................."do you have a relationship manager? "Alternatively, there are lots of fx companies, but they tend to offer only short-term forward contracts, usually under 6 months in my experience
me "er no I don't believe so.....but the business has grown considerably in the last 6 months"
HSBC "if you don't have a relationship manager you cannot access this facility"
me "ok, so what is the criteria for me getting a relationship manager"
HSBC " we cannot discuss that"
Marvelous.............
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