Sending money overseas is commonplace as a considerable amount of money flows across borders as remittances each year. For instance, more than $128 billion made its way out of the United States as remittances in 2017.
In the same year, over $16.8 billion was sent from Australia to different countries. While people continue sending money overseas from one country to another, they end up losing some money when the exchange of currencies takes place. However, there are strategies you may employ to reduce your losses, and these come in the form of different hedging tools.
What Forex Hedging Tools Can You Use?
Sending money overseas through a spot contract, where you get the existing exchange rate, is the simplest way. However, you get the ability to minimize your forex risk by using different strategies. These include:
- Forward contracts. Perhaps you feel that the market might experience a negative shift in the future. You could consider going the forward contract way. In this case, you get to lock in prevailing exchange rates for one to two years, depending on the company you select. You may create multiple forward contracts if required.
- Limit orders. Alternatively a limit order gives you the ability to target a better than existing exchange rate when sending money overseas. When the rate reaches the desired level, the company you work with carries out your transfer automatically.
- Stop loss order. A stop loss works in limiting your losses if the market takes a turn for the worse. In this scenario, you need to set a worst-case rate. When the rate reaches this level, the company executes your trade. For example, the current USD/AUD exchange rate is U.S. $1 = AU $1.40. You set a stop loss order for U.S. $1 = AU $1.30. When the value of the Australian dollar drops to $1.30 against the U.S. dollar, your transfer will be executed.
Which Overseas Money Transfer Companies Provide Hedging Tools?
Depending on where you live, you get to choose from different specialist overseas money transfer companies that provide hedging tools. This might also depend on whether you choose to register as an individual or a business.
- OFX. OFX is an Australia-based company that provides forward contracts, limit orders, and FX options. With an FX option, you get to carry out a transfer at a predetermined time and exchange rate by paying a premium. It accepts customers from most countries the world over, the U.S. included. You may sign up with this company as an individual, business, or online seller. Preset transfer amount thresholds give personal customers the ability to carry out fee-free transfers. However, you may trade in some currencies only over the phone. Access to the OFX website comes only in English.
- WorldFirst. This UK-based company provides forward contracts and firm orders; with the latter letting you target desired rates. These tools are made available for individual and business customers. While you may register with WorldFirst from different countries including Australia, it does not accept customers from the U.S. This company provides services for individuals, businesses, and online sellers. It applies a transparent pricing band over existing inter bank rates, and charges no additional fees. You may access the WorldFirst website in different languages.
- TorFX. This UK-based company provides forward contracts, limit orders, and stop loss orders for its business clients. It lets you register from most countries. Personal transfers carried out through TorFX come with no fees. This company provides travel money solutions for residents of the UK. It does not operate a multilingual website.
- Currencies Direct. This UK-based company provides forward contracts, limit orders, and stop loss orders. It accepts individual and business customers from most states in the U.S., and from most countries around the world. You may sign up with Currencies Direct as an individual, a business, or an online seller. Access to this company’s website comes in multiple languages. Residents of the UK may use its travel money services.
- XE. This Canada-based company accepts customers from most countries, including the U.S. and Australia. Business customers get access to market orders and forward contracts. XE charges no fees for carrying out personal transfers. It operates region-specific websites, and provides multilingual website access and customer support.
- Global Reach. Global Reach is a UK-based overseas money transfer company that provides services for individuals and businesses. It lets you choose from forward contracts, stop loss orders, and limit orders. All customers get access to currency dealers. The company does not operate a multilingual website. The amount you wish to transfer might have a bearing on the fee you need to pay, although it limits to a maximum of £20.
Exchange Rates and Fees
Sending money overseas depends on the exchange rate you get and the fee you end up paying. While some companies might offer fee-free transfers, they may make up for the same by adding mark ups on existing currency exchange rates. An easy way to determine which company is more cost-effective is to look at how much money the recipient stands to receive at the end of the process.
Do Payment and Transfer Methods Matter?
The payment method you use for your transfer tends to have a bearing on the fees you need to pay. Using a credit card to fund your transfer is typically the most expensive way. Using a debit card follows. Paying through a bank account transfer is usually the most cost-effective.
The transfer method you select also has an effect on fees. Transferring money directly into a recipient’s bank account tends to attract lower fees when compared to sending money to a cash pickup location. Sending money to a mobile wallet also tends to come at an added cost.
In conclusion you minimize your losses when sending money overseas by choosing from different hedging strategies. For instance, you can lock in the existing exchange rate to apply on a transfer you plan to carry out a year later. But if you are in no particular hurry to transfer money, you may also benefit by opting for a limit order.