hedge FX risk when living in another country?

[SanMiguel]

I can understand how a fixed amount could be hedged on the market.
For example,
- your earn your money in GBP
- you buy a house in France worth EUR200k and you pay your mortgage in EUR
- the EURGBP at the time you bought the house was at 1.4
So, to hedge this, anytime the EURGBP goes below 1.4 you want to go short to the amount of EUR200k so that you cover any increase in your mortgage.

However, how would you do the same for a rented property. The amount is not fixed in the same sense as the term of the rental is usually open. You want to keep your monthly payment fixed no matter what the exchange rate is. Easiest way would be to change all currency at the time and term of the rental but how do businesses do this sort of thing on a monthly rate or even how do they hedge yearly?

 

[Martinghoul]

That's the point of having a x-ccy basis swap mkt...

 

[SanMiguel]

That's the point of having a x-ccy basis swap mkt...

Que?

Let's say a rental place was EUR1000 per month and your contract was 6 months, it would be easy to hedge you put 1000x6 into the market and go long on EURGBP above the rate at the beginning of the contract (allowing some room for fluctuations or support/resistance).

But if at the end of the 6 months you wanted to stay longer and during that 6 months the rate moved from 1.4 to 1.1 euros to the pound, well, you can't open up a new hedge as your rent would already be more expensive...

 

[Martinghoul]

I don't understand your question... What do you want to do? There are all sorts of instruments that would allow you to do all sorts of payoffs.

 

[SanMiguel]

I don't understand your question... What do you want to do? There are all sorts of instruments that would allow you to do all sorts of payoffs.

Right...
Monthly rent = EUR1000 (for ease)
Current rate = 1.17
= £854 per month

You want to protect against an appreciation in the euro, ie if EURGBP starts heading towards 1:1 then your rent in GBP would actually be £1000, you would be losing £150 a month.
1 option: your contract is 6 months so you just exchange all the money now to euros and that fixes your rate at 1.17 - no issue.
2 option: you cannot do the above and you earn your money in GBP, so at the end of every month you exchange £ into euros. So, as EURGBP goes below 1:1.17 you open up an FX hedge to cover your losses but this needs to be done monthly.
3rd option: work out a percentage loss over 6 months and buy another instrument that pays out that percentage.

2nd option is the most realistic if you don;t have big savings. Only problem is the rebalancing every month. Realistically, smallest you could open a FX hedge on spot is around 10p a pip so may not matter much.

 

[Martinghoul]

You can do all sorts of things if you're a business. Specifically, you can do FX fwds and/or futures or use smth more complicated like a ccy swap. I'm pretty sure that's right, unless I am having one of my moments here.

 

[SanMiguel]

You can do all sorts of things if you're a business. Specifically, you can do FX fwds and/or futures or use smth more complicated like a ccy swap. I'm pretty sure that's right, unless I am having one of my moments here.

It's more a question of how you hedge.
Hedging a house purchase is easy as the amount is fixed, you house is worth x when you bought it and you want it to remain at that as a minimum so you hedge the FX risk.

A rent is not fixed because the rental term is not fixed, so how do you hedge that?

 

[Martinghoul]

It's more a question of how you hedge.
Hedging a house purchase is easy as the amount is fixed, you house is worth x when you bought it and you want it to remain at that as a minimum so you hedge the FX risk.

A rent is not fixed because the rental term is not fixed, so how do you hedge that?

Well, I assume by "term" you mean the amount. There's nothing you can do about that, as this is an uncertainty you can't control. So you can make a decision to hedge some representative amount or make a forecast of what the amounts are likely to be, based on other info. In the end, you got to put your **** in the custard, so to speak, and take some risk.

 

[anley]

You can't do it because the mortgage will be for many years.

One of the main problems with hedging, by people that don't understand it (not suggesting the OP doesn't) is they want it both ways, ie never lose any money if the currency moves against them, but share in upside if it moves with them. Sadly, that's a dream.

One of the best ways to hedge is to rely on common sense, ie if you're buying a foriegn property with a mortgage and cannot afford the mortgage repayments if they increase by 50% due to the FX rate then you cannot afford to buy the property.

Same with retirement, if you cannot afford a 50% move in the FX rate you cannot afford to retire overseas. Sadly, most brush this serious potential problem under the doormat but it has a nasty habit of coming back to haunt them....

 

[SanMiguel]

You can't do it because the mortgage will be for many years.

One of the main problems with hedging, by people that don't understand it (not suggesting the OP doesn't) is they want it both ways, ie never lose any money if the currency moves against them, but share in upside if it moves with them. Sadly, that's a dream.

One of the best ways to hedge is to rely on common sense, ie if you're buying a foriegn property with a mortgage and cannot afford the mortgage repayments if they increase by 50% due to the FX rate then you cannot afford to buy the property.

Same with retirement, if you cannot afford a 50% move in the FX rate you cannot afford to retire overseas. Sadly, most brush this serious potential problem under the doormat but it has a nasty habit of coming back to haunt them....

That's a rather different way to look at it isn't it?
What if I said to you that if you can't afford a 50% drop in the housing market in the UK then you shouldn't buy in the UK, wouldn't that be the same? How do you know the if the market is going to drop 50% and when?

The fact that the mortgage is for many years but fixed means you can hedge the property value, you know what you pay out over 25 years, you know that when the FX rate goes above this point, then you need to hedge, the price and payment term(years) is fixed, the FX rate is the variable.

With rentals, you have many changing variables.

Commercial traders hedging the price of copper with that of their FX market probably work in terms of tax years and write off periods 3 to 5 years but that is separate I suppose.

Idf you read through the news, there were a lot of people who retired to SPain but had to move back to the UK in recent years due to the crash - surely some of them would have been able to hedge on the EURGBP rates and remain in SPain rather than return?