welcome to this Killick explains finance video this week how to deal with foreign currency risk as a UK investor now what is the risk well essentially as a UK investor investing overseas which is a good idea by the way you've got two problems one it's called investment risk that is the fact that when you invest in say US dollars in America an American investment it could rise or fall in the local market but on top of that as a UK investor you've now introduced currency risk which you wouldn't have with the UK investment and that's the idea that the exchange rate between sterling and the dollar could move and that will affect your overall returns let's take a look at how and whether you want to do something about it now imagine you've got a thousand pounds to invest and you decide not to invest in the UK you invest it in the US markets you'll need to translate it into dollars first and let's take an exchange rate of one pound - one dollar fifty that gives you fifteen hundred dollars to invest in the US market and you invest it successfully they say what do I mean by that well the investment rises by five hundred dollars so now you've got two thousand dollars of US investments the original 1500 plus 500 and you think right I did enough let's cash it in and you bring it back at and this is quite important the same exchange rate you invested that's a bit unrealistic I'm ignoring transaction charges and bit to other spreads but let's say you can bring it back and the exchange rate hasn't moved great that becomes 1333 pounds in sterling which is a three hundred and thirty three pound profit on your original investment of a thousand pounds fantastic so far so what well here's the so wat let's imagine this time same scenario you invest fifteen hundred dollars rises by five hundred to two thousand dollars but when you bring it back to the UK the exchange rate has moved the dollar has weakened or see it conversely the pound is strengthened suddenly two thousand dollars at this new exchange rate one pound to two dollars only turns back into a thousand pounds in sterling which means your overall sterling four zero wait a minute didn't the investment rise $500 yeah but the exchange rate has cancelled out all of those games now it could work the other way of course that's the thing about foreign currencies imagine you've got your two thousand dollar investment out there you've made the same five hundred dollars you want to bring it back to the UK and the exchange rate happens to be one pound to one dollar so this time the dollars strengthened all the pounds weakened as the jargon goes turn 2,000 dollars back at that rate into sterling it becomes 2,000 pounds and suddenly wow you've made a sterling profit of a thousand all right you've got a local currency investment profit and you've made some money on the translation back into sterling great but the problem is that's a huge range of outcomes everything from not making money to making 333 pounds to doubling your money and a chunk of that is down to foreign exchange movements so should you not bothered to do anything about that well some people would just say solve it you know stuff it like I don't care I am exposed to foreign currency risk but actually I don't mind I can afford to live with that level of risk and I'll just gamble that the foreign exchange rate might come in my favor all right in which case you don't hedge but you have to live with the uncertainty I just mentioned so a lot of investors won't warn that foreign currency risk they'll be thinking well I don't want to do lots of hard work choose the right investments overseas get that bit right and then have a lot annihilated by foreign exchange games so actually I do want to do something about it I'm not comfortable running foreign exchange risk luckily there's a couple of sensible practical things you can do relatively easily so you'll get better visibility over cash receipts and payments point two there and it'll tend to suit people that are kind of doing larger or more regular transactions overseas and just don't want to run or can't afford to run more importantly that level of foreign exchange rate risk and currencies are pretty volatile so you know that risk is always out there so what can you do well one option if you're somebody that has assets overseas and it's going to keep assets overseas and all you regularly travel overseas maybe you work in other markets it makes quite a bit of sense to have a foreign currency bank account in each of the market that that applies too so you can have assets in the US property for example generating income in the u.s. you don't to bring that back into the UK if you can afford to leave it in the US because of the exchange rate risk pay into a US dollar bank account in the US and then use it to pay your dollar expenses in the u.s. so everything always keep everything you want to call it that you know offshore keep it outside the UK and you might run those bank accounts in a number of different countries if you've got assets in those countries and/or you you work there or visit regularly that can make a lot of sense but then there are the people saying well actually that's quite expensive that's quite a lot of hassle you know I don't do enough business to justify that sort of approach so is there an alternative and there is there is something called a forward contract and it's quite useful what you could do is say you know I'm someone who wants to pay for a house costing five hundred thousand dollars in three months time alright so maybe you've decided to buy a house in the US market perhaps is a second property if you're fortunate enough to be in that position that's a retirement property if you're not someone who's you know making a series of regular transactions in the US it's kind of a one-off and you're worried about what the exchange rate might be in three months time because the problem is if it moves you don't know what your sterling commitments gonna be to fund that house purchase and let's say at the moment and they're often quoted like this she's why I've done it the exchange rate is one pound to one dollar six six six six that's just a quotation convention what you could do is pick up the phone to a UK currency broker and say look I need to do a deal now ninety three months now I want to sell you three hundred thousand pounds of sterling that's how much I've got at a fixed rate of and I've made it the same rate just for illustration one dollar six six six six the advantage of that is that when three months goes by you will get from your currency broker the dollars that you need to pay for the house in other words the uncertainty is gone there certainly would have been you take you $300,000 in three months time translate it at the exchange rate then and it may or may not be $500,000 this way you take out the uncertainty and it works all the way around by the way so you could be someone who selling a house in the US one-off transaction don't do it very often you're gonna get $500,000 in three months because it takes a while for the cash to come through and you're thinking more correctly what the exchange rate changes I need to know what that's worth in sterling may be able to pay that into my pension when it comes in I can't just afford to sit and wait so you're thinking well the spot right now is one dollar buys you your point six of a pound if you like so could I do a deal with a broker I agree to sell you now $500,000 in three months time and a fixed rate of that alright so you're not handing over the money now be asserting the right now and that means that in three months time you'll get $500,000 from your house sale you hand that straight over to your currency broker here and they give you the amount you're expecting you need of three hundred thousand pounds of sterling you could have left it order chance you didn't want to take the risk now in practice just mention this there are a few things I've ignored all right I've ignored the fact that today's exchange rate for a foreign currency deal isn't going to be the exactly the same as the one you're quoted by the broker in my examples there is a gap between you spot race and forward rates and I've ignore bid to offer spreads but hopefully you can see what I've just done that there are at least a couple of ways that a UK investor can take out some of that overseas currency risk any questions to the usual place please you
