56 | WHY IT MATTERS WORDS | John Howell
FOREX
www.opp.org.uk | JUNE 2012
Why FX matters most
For many of us, just reading an article about foreign exchange makes our eyes glaze over and a snooze irresistible. But, for someone in the international property industry foreign exchange is such an important subject you really need to pay close attention. Not only can it help make you sales, it can also make you money.
nderstanding foreign exchange is important both when it comes to dealing with your clients and when it comes to running your own business. In this article we will be taking a quick look at the subject in preparation for a whole series of future articles specifi c to particular countries. The fi rst of these will appear in next month’s OPP magazine and they will also be available via the Data Center at OPP Connect. Foreign exchange is a multi billion
U
pound industry involving not just the banks but some very competitive specialist FX dealers. The amount of FX traded globally is about $XXXXX every single day. This far exceeds the daily volume of world trade. In fact, only about XXX% of foreign exchange transactions are involved in buying stuff. The rest – billions of pounds/euro/dollars per day are what might politely be called ‘investment’ basically, they are gambling. In some cases, they are pure speculation – betting on whether the dollar is going to rise or fall against the euro during a certain period. In other cases, their purchases (or the taking of options) to hedge risk associated with a completely different transaction. This article is concerned with the foreign exchange issues connected
with buying stuff and, in particular, the issues connected with buying (or selling) international real estate and the foreign exchange issues connected with running a business that deals with international real estate. However, before turning to the main subject of the article, I must say a brief word about the other type of foreign exchange transactions: the gambling. In my personal view, speculating in foreign exchange is
“Rates literally change by the second. As a result, the cost to the buyer will vary constantly”
extremely dangerous. It is high risk activity where you are usually gambling against people who have a lot more information than you do. For every person who claims to have made a fortune ‘investing’ in foreign exchange there are many more who have lost a great deal of money. The risk increases if you gamble over the sort term and it increases dramatically if you gamble with borrowed money.
The ‘foreign exchange for buying
stuff’ can also involve an element of risk taking but it is risk taking for a
purpose and, depending upon your attitude to risk, the risk could be minimised or eliminated. When a person wants to buy a property in a country that uses a currency different from that used by the buyer there is an obvious problem. The rate of exchange between the two currencies changes, literally, by the second. As a result, the cost to the buyer (measured in his own currency) will vary constantly. Sometimes the fl uctuations in value can be rapid and substantial. As a result, the buyer could fi nd himself having to pay a lot more (or, if he is lucky and things move in his favour) a lot less than he anticipated. Naturally, people who fi nd they have to pay a lot less than they expected seldom complain but the others often do. Worse still, they worry about the whole thing during the whole period of their purchase. Of course, the risk increases with the passage of time. A few years ago, when buyers were routinely buying properties of plan for delivery two years later, the risk and the amounts involved could be very large. Today, when most people are buying resale properties or new property ready for immediate delivery, the time between singing the contract and paying the price is usually measured in weeks rather than years and so the danger of dramatic changes
in the exchange rate is greatly reduced. However, it is not eliminated and many people still worry about the risk. There are fi ve main strategies for dealing with this risk:
1. Ignore it. You accept that the price you pay, measured in your own currency, will inevitably be rather more or rather less than you fi rst calculated. If the time between signing the contract and taking delivery is going to be quite short, if you are taking a mortgage in the local currency (so that the risk only applies to our down payment) and/or you are in a comfortable fi nancial position this option might appeal to you.
2. Agree the price in your own currency. This doesn’t change the risk. It just passes it on to the other party – the seller if you are the buyer and vice versa. Many people do not think about this option but it is, in fact, being used more frequently. Sometimes the buyer and the seller will be of the same nationality. For example, an American selling a property in Paris to another American. It makes sense for them to agree the price in US dollars and then, if they have to move local currency, to move the amount that corresponds to that US\ dollar price.
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