GLR

Given that the pound is finally fighting back against the Aussie dollar I was thinking of entering into some forex hedges.

My situation is that my salary is fixed in GBP but paid in AUD at an average exchange rate for the month. That means that my salary fluctuates each month as the forex rate changes - but my mortgage stays the same....

I can't enter into a standard forward contract with HIFX or MoneyCorp as I'm not physically exchanging currency - as I get paid in AUD.

What I really need is some form of contract for difference which allows me to agree a set GBP:AUD rate (say 2.3!) on my payday and if the actual rate is higher then I pay an amount and if the rate is lower then I receive a payment from the CFD provider.

Can any of the financially minded people on here advise - apologies in advance for the rather esoteric nature of this question. (for those of you in the UK just wanting to know what it's like here - it's great, the sun is shining and it's 28C in Bris today!)

Cheers

GLR

goatherder

Hi

Have a look at IG-Markets in Oz or UK. They offer CFD's to retail investors. The challenge you face is that these are typically leveraged products which I don't think you want but it may work out if you structure it correctly.

Its certainly a complicated investment decision to use CFD's for this purpose. I suspect your aim here is to smooth out your earnings situation.

My brain is not working this early in the morning. I'll have a think about it! I'm not sure that a CFD would do the trick but it needs some thought.

and I lived in Noosa for a number of years and now in wet london so no references to the weather appreciated.

Goat.

The Dean

Surely if you are sending money home (ie to the UK), it doesn't make any difference whether you hedge or not - the GBP equivalent amount remains the same?

If you are NOT sending money to the UK, get your salary converted to AUD!!

If I'm missing the point, just give me a good slap and I'll get me coat and go..........

GinaUK

I can see what you want to do. But I can't see how CFDs would help you. By their very nature CFDs are derivatives - which in plain English means betting which is always high risk.

What you'll be doing is gazing into your crystal ball and trying to guess what the exchange rate will be at your payday next month. If you're lucky you get it in the right direction and make money. But if you're unlucky and it goes the other way you lose money. The odds may be better than with the lotto, but you're still betting. And that doesn't strike me as a sound method for making money. You know what they say about betting/gambling: don't do it unless you can afford to lose the money.

I presume you have a salary review every now and then? Why not try and re-negotiate with your employer? Take your current GBP salary and multiply it by 2.5 and ask your employer to pay you that dollar amount every month. Then you won't have to worry about currency fluctuations. And if you convert your current salary at 2.5 that should be a nice amount.

Gina

goatherder

CFD's are not outright betting (depending on how you approach it) - its not the same as putting money on a dishlicker doing laps of a sand track - you should be alot better informed than when at the track. If you don't understand the underlying market then yes its betting. If you have a defined risk plan and a defined trading plan then I don't think its betting. For me its a way to gain more leverage (and risk!) in equities markets. Thats the way I use CFD's. Its early days for me I'll admit in this area but i'm enjoying so far. I will not be buying a porsche anytime soon but learning a heap about technical analysis etc.... plus I've managed to get a little more exposure to shares I hold in my long term accounts.

Anyway back to the question. I don't think CFD's are the way forward here. They are going to allow you to either buy AUD or Sell AUD at a certain point in time and then ride the wave. But you need to have an opinion as to which way its going to go plus have the cash to cover the margin (assuming you do a guaranteed stop loss). Either way its not the cheapest way to do this plus it would be a pain in the arse to monitor....

There has to be a better way......

I'd renegotiate with your company - ie pay me in AUD or pay me in GBP (and then go to someone like travelex / ozforex / etc.... to lock in a rate so you have some certainity)

Sorry - CFD's just are too complex for what you want to do here.

celcite

Try to get paid in your offshore accounts in UK.Its not wise to put any money in Australian Dollar because Australian Dollar is going back to its original rate now.Its not as hard currency as USD or GBP so you will loose money.

goatherder

whats the original rate for the AUD ? I assume you mean its going to return to around 2.50 to the pound ? If so the OP would be in the money if that happened.

The problem is actually the pound - its dropping against all currencies at the moment whilst the USD is appreciating. The AUD has come off a little recently but more significantly against the USD.

In any event my point is that currency speculation cannot be covered by broad statements like "Its not as hard currency as USD or GBP so you will loose money"

I think your problem is that the pound is depreciating and your income source is GBP but your expenses are in AUD. The age old dilemma with foreign postings! Either wear it or renegotiate.

tim_the_taf

I thought CFD's were equity based ? Whatever, they are a leveraged vehicle, so that if the rate goes the wrong way, you have to cough up the leveraged difference. At typically 10:1 that could put a hole in your salary. You also have to cover the difference before the position closes. Too dodgy mate. Just do what I do, take whatever the rate is that month and adjust your spending accordingly. Its not worth the worry.

goatherder

You can get CFD's for exchange rate products. Works the same its a just a contract for the difference in the movement in the exchange rate.

Any event I agree - its a risky approach. Alot of the providers will offer guaranteed stops for a margin premium (around 3 points normally) to cover the loss side of things.

asprilla

http://en.wikipedia.org/wiki/Currency_option

tim_the_taf

thx goatherder, i'll look into that, the GBP:AUD rate is reasonably predictable in line with normal charting analysis.

GLR

Thanks for all the advice and comments. My original post probably didn't make my situation too clear but Goatherder has hit the nail on the head here.

To summarise:
- My salary is fixed in GBP - I can't have it fixed in AUD as it was my decision to live in Aus so I have to suffer the forex risk rather than my employer. (and I'm now trying to hedge that risk).
- My expenses (particularly my mortgage) are fixed in AUD (particularly my mortgage)

The above means that as the pound depreciates against the dollar my salary in AUD falls each month but my mortgage and expenses stay the same. As a result, I've been suffering as the rate headed down from 2.3 to 2.0 over the Northern summer.

What I'd like to do is to to have some certainty over my AUD income by hedging against FX movements for say a 6 month period. The logic here is that if rates went back up so that I could agree a fixed FX rate of say 2.30 then I could easily cover my mortgage. I'd therefore be happy to take a fix at 2.30.

If the actual FX rate at the end of each month was higher than 2.30 then I'd have to pay the hedging provider the difference but I wouldn't mind as my salary in AUD would have gone up by an equal amount. If the rate fell below 2.30 then I would have suffered a fall in my AUD salary but I would be compensated by the FX provider by an equal amount.

That's what I want to achieve in theory but the reality seems to be harder to structure.

I don't think that I need the leveraged nature of CFDs as I'm not looking entering into a contract to make a trading profit but instead to hedge my forex risk.

I physically receive AUD from my employer (converted from GBP into AUD by the employer at the prevailing market rate). I therefore don't believe I want an FX contract such as an FX option as that offers the option to physically exchange the currency on maturity. Though I suppose that I could enter into a European FX option and then simultaneously buy and sell the currency on exercise being my payday each month (so benefitting from the difference between the option price and the market spot price). Can anyone recommend a reputable provider of FX options for that type of option.

Any more thoughts on this now that I've (perhaps) clarified my situation a little?

Any assistance is greatly appreciated.

Cheers

GLR

Windsor2

GLR

This may or may not be of help.

In the UK, HiFX is classified as a money transfer business. As a result we come under the remit of HMRC not the FSA and so cannot offer private individuals any form of option products.

However in Australia and New Zealand our offices can, as they are regulated by ASIC (Australian Securities and Investments Commission).

They offer what they call an Exchange Rate Guarantee (essentially a form of option).

By taking out an Exchange Rate Guarantee with HIFX you are securing the right, but not the obligation, to buy your currency at a pre-agreed exchange rate for a future date in time.

This means that you can fix the currency rate now and decide on maturity of the contract whether the current market rate is better or worse than that agreed. If it is worse, you simply make a claim under the insurance contract for the rate agreed. If better, you can transact at the improved current market rate.

Key benefits:
By taking out HIFXs Exchange Rate Insurance:
- You have protection of the rate secured and therefore will not be effected by an adverse movement in exchange rates.
- You can benefit from a subsequent improvement in the exchange rate.
- You have total flexibility as you are securing the right (not the
obligation) to an exchange rate you have total flexibility.
- You do not have to find a 10% upfront payment to secure the rate, as is required when taking out a forward exchange contract.

From what I understand you could set up a number of these for your monthly salary cheques as long as your total transfers exceed $50k per annum.

Can I suggest that you contact Brian Clarke in our NZ office? He's far more knowledgeable about the product than I am and will be able to answer your questions. It might well be the case that having talked to him the exchange rate guarante is not right for you but they could help you in other ways.

His email address is [email protected]. Alternatively you could phone him on + 64 (0) 9 306 3700.

In the meantime I'll ask around and see if I can find out the details of any other companies (whether they be banks or other brokers) who could help you. If I unearth anything I'll let you know.

As I said hope this helps and please don't hesitate to contact me directly if I can be of any further assistance.

Mark Bodega
Director - HiFX
[email protected]

GLR

Hi Mark

Thanks for your thoughts on this. My problem is that I don't want to physically transfer the currency whereas under your example above if I exercise the option then I have to physically buy the AUD with GBP on exercise date. I'm just looking to hedge an adverse movement in GBP/AUD without physically exchanging currency.

Please let me know if you or the team have any more thoughts on this.

Cheers

GLR