Author Topic: How to Buy Foreign Currency to Hedge Exchange Rate Risk?  (Read 391 times)

agusus

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How to Buy Foreign Currency to Hedge Exchange Rate Risk?
« on: May 04, 2020, 09:14:04 PM »
Does anyone know the best Mustachian way (low fee and convenient) to buy foreign currency in advance of visiting that country, in order to lock in the present exchange rate?

I realize this is a form of market timing, as the USD's current strength could just continue to get stronger. But our situation is somewhat unusual because we're part-time US expats that normally live in Canada 1/3'rd of the year (4 months) and Mexico 1-2 months. So over 1/3rd of our annual spending is normally in CAD and MXN which are currently at very good rates.

I looked into cash Forex (non-leveraged) which seemed the most obvious and lowest trading costs, but Interactive Brokers told me they only allow it if you're an Eligible Contract Participant (ECP) with over $10MM. And they said leveraged forex is disallowed for US clients by the CFTC.

I know there are ETF's for this (ex, CurrencyShare's FXC), but the expense ratio is 0.4% which seems high considering the ETF does very little work (and I normally pay 0.0% on my foreign spending, since my bank's ATM terms are fee-free).

secondcor521

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Re: How to Buy Foreign Currency to Hedge Exchange Rate Risk?
« Reply #1 on: May 05, 2020, 01:14:38 AM »
You can order foreign currency from your local bank.  Not sure what the exchange rate or cost of the service is, but I know my Dad does it before going on vacation, so the costs can't be that onerous.  This approach also has the obvious downside in your case that you might not want to hold on to that much cash for that long.

Also, if you set up local Canadian or Mexican bank accounts, you could just transfer money back and forth.  Although I don't know if that's possible legally or practically.

reeshau

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Re: How to Buy Foreign Currency to Hedge Exchange Rate Risk?
« Reply #2 on: May 05, 2020, 04:15:46 AM »
Many Europeans I know travelling throughout Europe use Revolut, which is essentially a bank account with multiple currencies.  (they are a non-bank finance company)  You could fund the account and move currencies at will, and even spend that money while travelling, rather than having to use it as a hedge only.

Catica

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Re: How to Buy Foreign Currency to Hedge Exchange Rate Risk?
« Reply #3 on: May 05, 2020, 04:24:42 AM »
Many Europeans I know travelling throughout Europe use Revolut, which is essentially a bank account with multiple currencies.  (they are a non-bank finance company)  You could fund the account and move currencies at will, and even spend that money while travelling, rather than having to use it as a hedge only.
I second Revolut. You fund the Revolut account with the money from your bank account and then you can exchange that to any currency at any time.  It costs nothing to exchange and it will tell you exactly what the exchange rate is (usually the same or very close to https://www.xe.com/currencyconverter/). You can pay with the Revolut card in any country or take out cash at an ATM. With the free account I think you can take out up to $200 USD worth of cash for free and above that there is a fee (I don't remember how much).  They recently opened it up to US citizens.

FLBiker

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Re: How to Buy Foreign Currency to Hedge Exchange Rate Risk?
« Reply #4 on: May 05, 2020, 06:53:03 AM »
We're in the midst of moving to Canada (hopefully in July) from the US.  I've been trying (so far, without luck) to open a Canadian bank account pre-arrival and will use Transferwise to exchange money into that account "while the rates are good" for our future downpayment on a house.  That being said, I don't see any reason why the rates won't be similar in a few months.  And, fundamentally, it is market timing, so I'm not sure how I feel about it.

agusus

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Re: How to Buy Foreign Currency to Hedge Exchange Rate Risk?
« Reply #5 on: May 06, 2020, 09:27:05 AM »
Thanks. Revolut looks like it could be exactly what I was looking for. The only caveats to watch out for are don't exchange currency on the weekend (they apply a 0.5% fee then to account for market fluctuations while the currency market is closed) and you're limited to a max of $6500 USD per month currency conversion.

agusus

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Re: How to Buy Foreign Currency to Hedge Exchange Rate Risk?
« Reply #6 on: May 06, 2020, 09:30:35 AM »
That being said, I don't see any reason why the rates won't be similar in a few months.  And, fundamentally, it is market timing, so I'm not sure how I feel about it.

That's true, it's likely the exchange rate will still be good in a few months. This is a bit off-topic but my reasoning is that CAD is currently held down by three factors: oil (CAD is very dependent on oil because they export a lot of it, and oil prices have crashed due to people not driving anymore), USD being the world-wide reserve currency, and a shut-down of tourism (hurts Canadian economy).
When coronavirus limits ease and borders reopen, all those factors may reverse - oil may go up (strengthening CAD), there's less need for USD as reserve currency, and tourism might help Canadian economy. No one knows when that will happen though.

highflyingstache

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Re: How to Buy Foreign Currency to Hedge Exchange Rate Risk?
« Reply #7 on: May 06, 2020, 05:37:22 PM »
So, in the trading side of things, if you're moving USD to CAD, or CAD to USD, we typically use Norbert's Gambit. Developed by a Canadian, you can simply Google search it, there's many many articles. The jist is as follows:

In your trading account (preferably tax sheltered) buy appropriately Horizon's currency tracking DLR or it's US equivalent.

Call your broker and ask them to "journal" the shares.

The minute you buy the shares, the price is locked in, so there's not gaming the price, it simply is what it is at the time of purchase (in theory you could limit order to wait for a more favorable price to buy the other currency at)

The whole process after buying, journaling, etc. takes close to a week. Once done, you'll see the shares in the opposite format (DLR/DLR.U) and you can simply sell the shares. Total cost: Cost to buy or sell a security. For me, it's $4.95 or so. Process, a week. Well worth my time, especially for higher amounts, say $10K plus.

Certainly you could do this process and save a ton in transfer fees and buying/selling spread...you can even limit the sell and buy to ensure longer term price you want, if you'd really like to get into it.

Norbert's Gambit. Sounds complicated; totally worth the hassle.