FX Option

My question is this:

When purchasing a property outside the euro (including countries that are not pegged to the euro),an investor is at the mercy of teh currency exchange. In fact,if tyuo think about it,the currency exchange can be far more volatile to the point that,in some countries,the property bet turns into a side show.

However - you can cover yourself using FX options. (i.e. for a small premium,any movements that go against you,you can lock in at todays price and any movements that go with you you are allowed benefit from)

How do I go about buying an FX optiion in Ireland ?

by the way - for anyone who has bought outside the eurozone and not bought an FX option then I think you are mad.

qwertyuiop said:

How do I go about buying an FX optiion in Ireland ?

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Contact the treasury/capital markets section of any of the banks. I would imagine that you would have to want quite a large amount of protection for them to be interested.

Thanks for that.

By the way - what do you mean when you say you imagine I would need a large amount of protection behind me ?
As in - if my understanding is correct (which it may not be!) then all I can lose is the premium I pay for the option no?

The larger the amount of protection, the larger the premium.

Treasury/capital markets will only be interested if you are buying a lot of protection, say €250k or so.

The easiest way to hedge this type of currency exposure is to create a natural hedge and borrow in the currency of the asset you intend buying. If this is not feasible for you then hedging via a fx forward contact can be done with one of a the major CFD providers but this will have mojor cash flow implications that you have to be prepared absorb e.g. the fx rate moves 5% your favour so on one hand the translation value of foreign property goes up (paper profit to you) but on the other you have a equal and opposite (I am simplyfing for illustation as in reality you will not have an exact 1:1 as the forward fx rate will trade at a premium or discount to the spot rate to equate the interest rate differential on the currency pair in question) loss on the hedge. Your problem here is is that this is a actual loss that has to be make good in cash with the broker via margin call.. how do you fund this? You cannot sell part of the property! what it the fx rate moves 20%? Can you afford to pay for the hedge?

Options may be possible in G7 currencies but again dont underestimate the cash flow implications. The premium oin a 1 year EURUSD call with a stike at the prevailing spot rate will cost you c.8% of the notional i.e. 20k for a 250k contract so the fx has to move at least this much before you even break even on the hedge. The advantage of an option over a forward is that you know the cost in advance and you can participate in upside beyond the premium but the protection afforded is not the linear payoff you get with the the forward. Trading options with a tenor > 1year will get very epensive as liquidity is much thinner in the longer dates. How long would you intend holding the property.. the hedge would have to renewed periodically.

Thanks for that bigred.
I've done my research and a put option of (todays value) of €500k in polish zlotys would cost me c. €17,500 - which is a lot.
You ar eright in that the best thing to do is borrow in zlotys.
Just to confirm - Am I correct in saying that if I borrow in zlotys then only the capital gain willbe exposed to currency fluctuation as opposed to the entire amount?

Also - do you have any advice in relation to borrowing the YEn to buy property ?

hi qwerty.. I did not appreciate you were taking about a Euro region currency.. these "eurobloc" currencies obviously have a pretty decent correlation to the EUR so the volatility is lower hence the option a little cheaper.. what tenor was this option for? Personally I would feel much more comfortable running naked eurobloc currency risk versus say EURJPY or indeed EURUSD and I suspect your option premium will go up in smoke.

To answer you first question.. you will be open to EURPLN risk to the extent the loan value < property value so as you pay back the loan and the property value increases in value you will accumulate fx exposure.

Borrrow JPY.. carry trade!!. Difficult (not undoable) but very risky in my opioion.. if you want to borrow in a low yielder do it in a euro region currency.. CHF or even CZK.