Currency Transactions Calculator
You have found a property in Spain. It is for immediate sale. You are able to buy it outright. The price is 200,000 Euros. Your bank quotes you an exchange rate of 1.65 to £1, which equals £121,212. It takes a month to finalise the paperwork. You then give your bank the go-ahead to buy the 200,000 Euros.
But instead of asking you for a total of £121,212, the bank demands £126,582. An additional £5,370 due to currency fluctuation.
During the four weeks since the bank quoted its exchange rate of 1.65 Euros to the £1 the Euro has strengthened as a result of currency fluctuations. Now £1 buys a mere 1.58 Euros (It could have been worse and could have happened faster). You were aware that the foreign exchange market fluctuates from time to time. But never for a moment did you anticipate such an adverse change in such a short time. Even if you were aware of the risk, you were unaware you could protect yourself against it. No one at the bank mentioned the subject. No-one referred to 'stops' and 'limits', the automated mechanisms which big business uses as a matter of course to protect their money when undertaking foreign currency exchanges. Nor did you have any idea that you might have been able to find a more advantageous rate than 1.65 to the £1 in the first place.
The Currency Exchange Rate
The rate offered to you by your bank is not the one and only currency rate available. And it certainly won't be the best, simply because the major banks make their money out of dealing in corporate millions, not by dealing in the sort of sums that buy an attractive overseas property. Shopping around does pay dividends.
Transferring Money
The cost and time it takes to transfer money varies considerably, as do bi-currency services, so shop around in your home country and also in Spain. Buying euros in your home country is not your only option. Most people do not realise the commissions and fees charged by Banks are negotiable, do not be afraid to haggle!
Capital Protection
The property-buying scenario above gave some idea of the volatility of the foreign exchange markets. How can you protect your capital against such an eventuality? Your chosen foreign currency provider should offer you financial mechanisms such as 'stops', 'limits', 'forward contracts' which corporations use automatically to protect their capital. There are some excellent and reputable companies who offer much better exchange rates than the high street banks, and some even allow you to pre book currency at a set exchange rate for the future, this is particularly important for off plan purchasers wishing to protect themselves from the falling pound / dollar.
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Off Plan Purchases - Future Payments
Buying a property outright is relatively simple. But what happens if you are buying a property in Spain that is no more than an architect's blueprint and a developer's plan? You will be asked to pay a deposit, and then to make three or four subsequent payments several months apart. You may know precisely when you have to make each payment or you may not. You may know exactly what proportion of the total price you have to pay each time or you may not. Although the market might move in your favour during the months it will take to conclude the deal, equally it might move in the opposite direction. Unless you take precautions at the outset, you are putting your capital at risk.
Q. How can you avoid the gamble?
A. You arrange with your foreign currency provider to use the mechanism that all big businesses use to protect themselves when exchanging a large sum into a foreign currency: you use what is known as a forward transaction. There are two versions: the Fixed Forward and the Forward Time option.
1. Fixed Forward Pricing
This is a contract your foreign currency provider should suggest if you know in advance the dates on which you need to make your payments, and the amounts in every case. Let's say you must pay a deposit of 10 per cent of the price of the property within the next few days; another 40 per cent in 3 months' time; another 20 per cent six months from now; and the balance at nine months. You provide your foreign currency provider with all the information, and he or she will be able to offer a price for each of those staged payments on a guaranteed basis.
2. Forward Time Pricing
It's possible, however, that you know little more than the final price of the property and the developer has promised your house will probably be ready to move into in eight months' time. In this case your foreign currency provider should give you the option of fixing and guaranteeing a price in the future without restricting you to a fixed date for you to take delivery - for example, having the ability to draw 200000 Euros between September 1st and September the 15th.
Spot Transactions
Most property deals by their nature take a certain amount of time. However, if an opportunity comes 'out of the blue' and you have to seize the moment here and now, your foreign currency provider can carry out a spot transaction. The currency is bought in today's market for cash.
