How to hedge personal finances against currency exchange (Euro/AuD) upheavals?

March 4, 2009 7:04 PM

Please help me calculate the risks and likelyhoods of the Euro rising or falling against the Australian Dollar in the next twelve months.

I live in Australia, but derive most of my income from my Spanish clients, so I get paid in euros. In the past year this has meant that my income has grown by almost 25% without me doing anything. Yeah, I can't believe my luck either. In fact the idiot who paid me 10k euros a year late has ended up doing me a favour. But this is random blind luck, and one doesn't feel comfortable having to trust on luck, hence this question.

We are having a baby and we plan to go visit the Spanish family in the next 12 months, and I travel there for work now and then, so it also makes sense to keep some money in Spain. But we don't know when, or how much to keep or transfer. Obviously getting all our money here now is not very smart if the AuD is going to drop further. But neither is keeping it in Europe if the AuD is going to rise.

Does any mefite have a clue of what is the optimal strategy for benefiting from the possible currency ups and downs, or at least not suffering from them? Purely theoretical talk just for the purpose of education also appreciated.

posted by kandinski to work & money (8 comments total)

My understanding is this is the idea of the currency futures market (FX futures). I suspect you can look up the price that contracts of Euro/AUD are going for across the next 12 months and get an idea of what people expect the changes to be.
posted by rudyfink at 7:31 PM on March 4

Probably the best question is: what are you going to need eventually, euros or Aussie dollars?

The best way to go might be to figure out how many EUR you're going to need for your trips to Spain, then transfer the rest to AUD if you're living in Australia permanently; having euros when you're living in Australia will just give you a currency risk headache. Also, if you're transferring large amounts, have a chat to your bank manager - they should be able to give you a better exchange rate than the usurious board rates.

MefiMail me if you want; not sure if this was a very clear explanation.

(Also, rudyfink - currency forwards and futures depend almost entirely on the interest rate differential, rather than people's expectations of where the currency is going to go.)
posted by The Shiny Thing at 8:19 PM on March 4

Trying to make money from currency speculation is notoriously hard and high risk. IMO, you might as well play roulette.

My advice is to try and decide where you're going to spend the money. If 80% of your expenses are going to be in Aussie dollars and 20% are going to be in Euros while you're in Spain, that's probably about how you should keep your cash reserves. If things fluctuate to your advantage, awesome; if they don't, shrug and get on with your life. (Remember to consider rainy-day/emergency funds in addition to this; those funds should probably stay wherever you'd be likely to incur the emergency costs — probably your permanent home.)

Now, if you want to hedge against losses due to currency fluctuations, or basically insure yourself against them, that is a totally different and much more tractable problem. You can look at futures contracts essentially as a way of selling your risk: you pay money, in exchange for something that increases in value if a situation that would normally be bad occurs. How you'd want to do this precisely is out of my league, but I do know it's possible and something large corporations do fairly frequently to insulate themselves from currency shifts. You probably want to consult a professional in Australia who handles investments for corporations (since it's not something a lot of individuals do) if this is the route you want to take.

But I would really not try to make money off of forex speculation on an ongoing basis via market timing, unless you have access to insider information (to governmental or central bank stuff) I don't see how an individual will have any hope of beating the market.
posted by Kadin2048 at 10:08 PM on March 4

Discussing this with Mrs Kandinski a while ago, we just realised that keeping money in Spain beyond what may be immediately needed is silly. Future euros are always coming in the future, and if they stops coming, well, the future needs are in Australian dollars anyway. So getting as much money as possible here as soon as possible is the best measure.

And come to think of it, the same as these wins feel silly for being just dumb luck and not coming from any decision, any loses coming from a decision would feel much worse than if they came from just the way things go.

Shiny Thing: you mean negotiating a better exchange rate with my Australian banker at the receiving end? In my experience, Australian banks insist on the boilerplate, and are less flexible than Spanish banks. And I can't negotiate with the Spanish banks because they are my clients' accounts. But it's worth a try anyway, so I will visit my manager tomorrow.
posted by kandinski at 12:51 AM on March 5

i think this is the worst time in at least 25 years to have large amounts of money dependant on currency exchange. don't trust luck. minimise the risk as much as possible. remember that forex trading is about the most risky form of trading.
posted by edtut at 2:24 AM on March 5 [1 favorite]

Kandinski: exactly. If you've got a big chunk of FX to do (it's worth a shot above $10k or $20k), ask to have a chat to a senior banker of some sort. They'll be able to help you out - especially if they think you might have more to do in the future.
posted by The Shiny Thing at 3:25 AM on March 5 [1 favorite]

I have a friend in Canada who does most of his business with American clients, so he has similar exposure to FX risk. He attacked the problem a little more directly: he had some kind of currency exchange clause put into his client contracts (only new contracts? modified existing contracts? I don't know). I don't have the precise details, but the gist was that the impact of any changes in the exchange rate would somehow be shared between the two parties. It wasn't that either party was made immune to FX risk, but that whichever side benefited from a change in the exchange rate would somehow share part of the benefit (half?) with the other side.
posted by mhum at 8:52 AM on March 5 [1 favorite]

mhum: thanks, it sounds like a very good idea if the clients accept it!
posted by kandinski at 12:59 AM on March 7