International Payment Trade Types: How to Mitigate Currency Risk

The overseas property buying process can be stressful – from the language barrier to new laws and unusual processes. But there’s another anxiety-inducing factor that’s often overlooked: your budget’s exposure to currency risk. 

Don’t let exchange rate movements drive up the cost of your property purchase. Give your nerves a rest by leveraging the right trade type for your requirement – and safeguarding your budget against currency risk 

Spot contract 

These ‘buy now, pay now’ transactions involve converting currency based on the current exchange rate – making them useful if you need to make a payment immediately. 

Depending on your requirements and the currencies being exchanged, you can choose to pay for and receive your currency on the same day, the next day, or the day after. 

A spot contract is also a good option if you don’t need to send out the purchased currency immediately. We can hold your purchased currency in your E-Wallet for as long as you wish. 

Forward contract 

This allows you to fix a price (a forward rate) based on the current market rate for buying or selling currencies on a specified date in the future, without needing to have all your funds available. 

Having taken advantage of a favourable rate in the current market, the forward contract protects you from adverse fluctuations which could make your exchange more expensive– so you know how much your future international payments will cost. 

Example of a forward contract in action 

Steve has paid a €20,000 deposit towards a property in Spain via a spot contract and needs €200,000 in the next three months. 

Currently, the rate is better than he budgeted for, so he decides to use a forward contract. 

Steve’s account manager secures him a competitive rate of exchange for a date in three months and books the deal. He sends a deposit towards the forward contract to his Lumon account. 

One week before completion, Steve sends the balance to Lumon and confirms the payment details. Lumon moved the money to Steve’s notaire at the agreed rate in time for his purchase to complete. 

Limit order 

A limit order is an instruction to target an exchange rate above the current market level. If the market reaches that desired level the order will trigger. 

This contract type is perfect if you need to make a transaction but are not bound by tight deadlines and feel the rate may improve. 

Example of a limit order in action 

Claire is buying a property in Spain for €120,000. The current GBP/EUR buying price is 1.1850, so the property would cost £101,265. 

Completion isn’t for another three weeks, so having spoken to her Lumon account manager, Claire decides to aim for 1.20, which if achieved would bring the cost down to £100k. 

Claire places the limit order and waits. Within a week the pound is on the up and the 1.20 price is triggered. 

Claire sends in her £100k within two working days, supplies her onward payment details and Lumon arranges the transaction for €120,000. 

By holding off from buying straight away, Claire is now better off by £1,265. 

Stop loss order 

A stop loss order is an instruction to buy at an exchange rate below the current level should the market drop. If the rate falls to that level the order will trigger. 

This contract type is helpful if you are working to a tight budget and can’t afford to go below a certain rate or want to have a worst-case scenario locked in. 

Richard is purchasing a villa in Spain and needs to transfer €115,000 to complete his purchase in the next ten days. The current rate is 1.1650, so to purchase the euros it would cost £98,712. 

Example of a stop loss order in action 

Having spoken with his Lumon account manager Richard believes the pound may strengthen, so decides to wait.
However, he has only budgeted £100k for the final balance. With that in mind, Richard decides to book a stop loss order at 1.15 in case the market moves against him.

Then out of the blue, the rate falls sharply below 1.15 to 1.1428 triggering Richard’s price. While frustrated that the higher level hadn’t been taken when available, Richard is happy he didn’t have to buy at 1.1428, which would have cost an extra £630, taking him over budget.

Manage your currency risk with Lumon

There’s no one-size-fits-all strategy for mitigating currency risk exposure. That’s why we assign you a personal account manager who works with you to understand your payment requirement, risk appetite, and timeframe. This personal approach allows them to help you develop and execute a bespoke hedging strategy that leverages one or more of these trade types.