"Forward Cover" when buying Oz Dollars

[JacoCT]

Has anyone maybe purchased Oz dollars on a "forward cover" basis from South Africa before. We've just arrived back from Aus on our LSD, booked IELTS for September and appointed our immigration agent today to start with our Business Visa application. By the sounds of it we will roughly be waiting 12 to 16 months for our visas. My dilemma at the moment is that I want to purchase some Oz dollars now while the exchange rate is not too bad but most of my money is "stuck" in my house and business. I read somewhere that you can buy foreign exchange at a fixed rate of that specific day, pay 10% deposit only and pay the rest of the money after 12 or 24 months. This situation will suite me perfectly as my house and business should be sold within the next 12 months (hopefully) and only then will I have all my funds available for transfer.

Anyone out there with some experience in this? I would like to know which firms specialize in this? Is the rate much more than your normal interbank transfer rate etc.

Thanks

Jaco

[DeonJ]

Jaco any of the banks can do that, but for that period I would rather suggest you also look at an option call contract. You pay the premium and that is it, but then you have the up side with limited downside.

With a fixed rate you can have some serious downside if the rand strenghens substantially.

[JacoCT]

Thanks Deon, I'm waiting on Bidvest and Old Mutual to phone me on Monday so I'll definitely ask them about the contract option as well.

Jaco

[DeonJ]

Thanks Deon, I'm waiting on Bidvest and Old Mutual to phone me on Monday so I'll definitely ask them about the contract option as well.

Jaco

Just make sure you enquire about the CALL option contract and not a PUT option.

[JacoCT]

Will do thanks, whatever that means. I guess the contract rate is normally a bit higher thanyour average transfer rate?

Jaco

[DeonJ]

Will do thanks, whatever that means. I guess the contract rate is normally a bit higher thanyour average transfer rate?

Jaco

The contract rate will depend on the view the trader/institution takes on the market. They use technical analysis of charts and consider all the fundamental issues, like both countries' inflation rates, political stability, interest rates, etc. Normally the institutions shouldn't differ alot, but that depends on the traders.

The option contract is like any option you buy. You choose the level you want to buy AUD.

Say for instance the rate is now R6.80 to the AUD and you are afraid that it might depreciate to say R8.00 next year this time. Now if you buy a call option to buy AUD by then at R7.00, the market determine a premium to pay for that option. Say for instance R25000.

Now if the rate does fall to R8.00, you are abviously going to exercise your option of buying the AUD at R7.00. You thus have to factor the R25000 in and determine your net payment by deviding the R25000 into the number of AUD you buy and add that to the R7.00 you are actually paying.

Example: AUD 100,000 under these circumstances will then cost you R700,000 + the R25,000 premium, in other words you would have effectively paid R7.25 per AUD. Still R0.75 less than the rate at that stage of R8.00

Should the rate however strenghen to for instance R6.00 you would not exercise this option as you can buy the AUD at a cheaper rate on the spot market.

Then the net effect will be R600,000 + R25,000 premium. Thus you will be paying R6.25 per AUD. This will be R0.25 more than the spot rate, but atleast you covered your risk of the rand depreciating. You thus have more upside than downside

You will have to look at the following making your decision:

1. What does the market expect interms of movement and volatility (size & frequency of the movements)

2. What is the price of the option premium going to be. The closer the option strike price (the R7.00 in the example above) to the spot rate (R6.80 in the example), the higher the price of the option is going to be. So you must balance everything.

3. What is the commission you are going to pay on the forward contract.

Please keep in mind this strategy will work better for a long term view like a year in your case. Premiums on forex transactions are normally too expensive to do it on a one or two month basis. Unless ofcourse the volume is very big.

I will search for a url explaining it. Don't know if I made it clear enough.

If you want to do this, I would suggest that you seek out a registered Forex dealer. Be carefull with the banks. I just want to check something on Monday and will PM you with details of a registered trader that can advise you and assist you with this.

Edited August 2, 2008 by DeonJ

[JacoCT]

Deon,

Thanks, I've never been great on stock market issues but I do understand your explanation, makes perfect sense. I found 2 more companies on the web that deals in forward cover contracts (from what I can gather) one is World Forex (www.wfx.co.za) and the other Lucrative Exchange (ww.lucrative.co.za). I mailed both of them so hopefully they'll get back to me on Monday.

Thanks again for the assistance.

Jaco