Author Topic: Hedging currency prices in advance of travel  (Read 4725 times)

Mississippi Mudstache

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Age: 37
  • Location: Danielsville, GA
    • A Riving Home - Ramblings of a Recusant Woodworker
Hedging currency prices in advance of travel
« on: March 23, 2015, 01:44:35 PM »
My wife and I are planning to visit Norway this July. The exchange rate on the US$ to the krone (NOK) is at a historically favorable point at the moment, but a lot can happen in 4 months. It could get better. It could get worse.

I consider this mostly an academic exercise, since we don't plan to spend more than a couple thousand US$ anyway, but suppose for a moment that I wanted to hedge against a decline in the value of the US$ in comparison to NOK for the next 4 months. What would be an appropriate way to do this?

I can imagine that somehow converting half of our anticipated spending into NOK today would be one way to hedge - but I wouldn't even know how to do that. Would it be possible to purchase options that would protect against downside risk? I am a newbie when it comes to currency exchange. I usually accomplish this by withdrawing money from an ATM once I arrive in the country. I would love to learn about more sophisticated options, even if I never actually use them. I have done my googling, but mostly what comes up is for institutional investors, not a dude planning a vacation.

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8202
  • Location: United States
Re: Hedging currency prices in advance of travel
« Reply #1 on: March 23, 2015, 01:47:35 PM »
I've found that the best exchange rates come from credit cards and local ATMs.

Unless you anticipate great change in the exchange rate (perhaps you have been watching it for several years and see a trend?), it seems unlikely you'll be able to save much by purchasing cash in advance at a US bank change rate, especially if you don't plan to spend all that much.

I'd just make sure you have a 0% foreign transaction fee credit card and go with whatever it is when you get there.

Mississippi Mudstache

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Age: 37
  • Location: Danielsville, GA
    • A Riving Home - Ramblings of a Recusant Woodworker
Re: Hedging currency prices in advance of travel
« Reply #2 on: March 23, 2015, 01:57:14 PM »
Yes, I doubt that I will actually take action on anything. I was just curious how it could be done if someone had a mind to do it.

I have been checking the exchange rate occasionally since my wife and I were engaged in 2009. We wanted to go to Norway for our honeymoon, but we couldn't afford it. Now that we are in a better position financially, and the exchange rate is more favorable, we're finally going to go. I have no clue which way the exchange rate will go in the next four months, but if I could exchange UD$500-1000 into NOK right now without fees, I would probably do it. I assume fees would be the killer.

I'm a red panda

  • Walrus Stache
  • *******
  • Posts: 8202
  • Location: United States
Re: Hedging currency prices in advance of travel
« Reply #3 on: March 23, 2015, 02:08:18 PM »
Fees are definitely a big problem.  But the last couple times I traveled, I found that the rate offered to me in the US was so bad compared to what ATMs in the countries I was going to were giving me.

Maybe you should find a message board that talks about travel to Norway, and see if people there think this is an exceptionally low rate, and what they are doing.

forummm

  • Walrus Stache
  • *******
  • Posts: 7388
  • Senior Mustachian
Re: Hedging currency prices in advance of travel
« Reply #4 on: March 23, 2015, 02:12:02 PM »
Let's say the rates change by 5%--5% is HUGE for currency shifts. Then your $1k that you would spend in cash is now $50 more expensive. <shrug> What if it gets 5% cheaper? Lots of analysts are predicting further decline.

kiwigirls

  • Stubble
  • **
  • Posts: 172
Re: Hedging currency prices in advance of travel
« Reply #5 on: March 23, 2015, 02:18:59 PM »
Hi I do this for our big trips.  I buy approx. 50%-80% of our travel money when I book the trip (if the rates are favourable) and get the rest just before we go.  If its only a few thousand dollars just buy cash and hold it until you go.  I am usually happy to travel with up to $2k cash spread between my husband and I and across 4 bags (to minimise the loss if it gets stolen).  You normally get the best exchange rate at the banks for cash.  For larger amounts I use a currency card - not sure what they call them in your part of the world but we have a couple (offered by Visa & MasterCard) where you load it up with cash and convert it to your chosen currency.  Exchange rate is less favourable than cash but I opt to pay it for the security.

Mississippi Mudstache

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Age: 37
  • Location: Danielsville, GA
    • A Riving Home - Ramblings of a Recusant Woodworker
Re: Hedging currency prices in advance of travel
« Reply #6 on: March 23, 2015, 02:39:07 PM »
Let's say the rates change by 5%--5% is HUGE for currency shifts. Then your $1k that you would spend in cash is now $50 more expensive. <shrug> What if it gets 5% cheaper? Lots of analysts are predicting further decline.

I appreciated the level-headedness of your response. You are, of course, correct. I would note that the exchange rate has changed by 40% in the last year, so it wouldn't surprise me if it changes by more than 5% in the next 4 months. However, as I have previously noted:

...I consider this mostly an academic exercise...
...I would love to learn about more sophisticated options, even if I never actually use them...
...I doubt that I will actually take action on anything...
...I was just curious how it could be done if someone had a mind to do it...

and so on and so forth.

In other words, I'm aware that it's not going to be a big deal on this trip. However, in the future (when I'm FIRE'd), I could see myself planning foreign vacations based on exchange rates. If I were planning an extended outing in a foreign country based on current exchange rates, then I could see the benefit in locking the favorable rates when the trip is booked - if the fees are low enough. So no need to hammer down on the futility of my question-asking. I'm just interested in additional information-getting for the possible benefit of future vacation-planning. Okay? :)

For larger amounts I use a currency card - not sure what they call them in your part of the world but we have a couple (offered by Visa & MasterCard) where you load it up with cash and convert it to your chosen currency.  Exchange rate is less favourable than cash but I opt to pay it for the security.

Okay, this is intriguing. I've never heard of a currency card. I'll have to look it up!

NathanP

  • Stubble
  • **
  • Posts: 137
Re: Hedging currency prices in advance of travel
« Reply #7 on: March 23, 2015, 03:52:44 PM »
The method that I use for hedging against currency shifts is to pre-book any hotels, flights, tours, and ground transportation once I have firm dates. Frequently you can get very good discounts by prepaying (especially for hotels and transportation). Note that this only works if you have a set itinerary.

I typically don't worry about out-of-pocket costs such as food, entrance fees, and local transportation as this doesn't amount to much. As others have mentioned, use a credit card with no FTF and pull cash from a local ATM. My bank doesn't charge fees so I will pull 1 or 2 days worth of cash so as not to have any extra currency when heading home. I do bring along some cash (dollars) just in case I can't find a working ATM at my arrival airport or there is some other problem while travelling.

AlexM1359

  • 5 O'Clock Shadow
  • *
  • Posts: 6
    • Knightsbridge FX
Re: Hedging currency prices in advance of travel
« Reply #8 on: May 01, 2015, 07:45:22 AM »
I also prebook my hotels in advance, sometimes they have amazing deals throughout the year, closer to the date they either hike up the prices or no space available. Another thing ive been doing recently is exchanging money. When travelling overseas I used to deal with banks but i did my research and it seems that banks also hike up the prices..which could cost you a pretty penny if you are exchanging a large amount. Banks are typically 2.5->3% from the market exchange rate...now thats a big difference, im sure you could use that money elsewhere for your travel. Recently i was exchanging over 5k and best place I found was KnightsbridgeFX. They are pretty safe and legit, service was great and I got a way better deal than the bank...so I guess its definitely one of the ways to save on currency prices when you are travelling. Check them out maybe you can get a good deal as well www.knightsbridgefx.com