Foreign Exchange Options: Money Transfers
Overview of the options available for currency exchange in the Netherlands...
There are many circumstances in which expatriates living in the Netherlands, or people with property or investments in the Netherlands may need to make occasional or regular currency transfers from GBP, USD, AUD or some other currency, to the euro.
There are ways to minimise the risks of a fluctuating currency market and the rate of exchange on a transfer. Currency transfer options depend on how frequently the transfers need to be made, and whether the buyer has access to all or some of the funds to be transferred. Foreign exchange currency dealers can assist with these transactions.
Buying with access to all funds
A person with access to all funds has two options:
- Buying currency for spot (a risk-free option)
- Buying currency as needed (a higher-risk option)
Buying currency for spot (spot contracts): This option is suitable for buying all of the currency needed immediately thereby fixing the cost at the outset. The purchased currency can be deposited and left to earn some interest while being available for sending payments as required.
Buying currency as needed: This is a riskier situation as the purchaser buys euros each time they are required. This exposes the currency buyer to rate fluctuations and uncertainty about the final "real" cost of making a payment.
Buying with access to some funds
The forward contract: A person with access to some of the funds needing to be transferred can buy one or more forward contracts which secure a fixed exchange rate for up to two years in the future.
A forward contract means that currency can be bought immediately from foreign exchange currency dealers and paid for later. The buyer is required to pay a 10 percent deposit initially, and the 90 percent balance on the maturity of the contract.
- If a buyer wants £50,000 worth of euros, but does not need to send it for three months, they can agree on the exchange rate, place a £5,000 deposit and pay the remaining £45,000 balance three months later
- If the exchange rate moves at all in that three month period they are not affected as the currency is charged at the originally agreed rate
- A rate may be fixed on all currency requirements up to 24 months in advance
Forward contracts can also be used for making regular monthly currency transfers (such as overseas mortgage or pension payments). The exchange rate for these payments can be fixed for up to two years.
Buying at a specific rate
The market order: A person looking to achieve a specific rate can arrange a market order. This allows a buyer to target a better rate of exchange. A currency dealer monitors the markets on the buyer's behalf and should the market reach their predetermined preferred exchange rate, currency is bought or sold automatically. The order is live 24 hours a day and can be amended or cancelled at any time prior to the transaction taking place.
- Limit orders are based on a set target exchange rate at which, if the rate is achieved, the currency is bought or sold
- Stop loss orders set a minimum level at which the buyer authorises their currency to be bought or sold