How To Minimise Currency Risk When Living Abroad
What Is Currency Risk?
As an expat living abroad, understanding and managing currency risk (also known as exchange-rate risk) is crucial to avoid any unpleasant surprises when it comes to your finances.
This is the risk of the value of one currency changing compared to another. It can affect individuals and companies who have assets, investments or business in different countries, leading to unexpected losses or gains.
To manage this risk, some companies and investors often use tools like forex, futures or other financial products to ‘hedge’ or protect themselves from any unpredictable fluctuations.
How are Expats Affected?
Without the correct management, currency risk can have a significant impact on the following aspects of life for an expat:
01 Foreign investments
As an expat, you may have chosen to invest in your new country of residence, or even in multiple countries. When you are investing in a currency different from your own, changes in exchange rates can impact the value of these investments. This could mean either gains or losses when converted back to your home currency, depending on how exchange rates move.
02 Income fluctuations
You’ll face currency risk any time you are getting paid in one currency but spending or transferring money in another – such as sending money back home. Exchange rates can have an impact on how much money you take home, with favourable rates boosting your income but unfavourable rates meaning you end up with less.
03 Cost of living
In the event of the currency of your residential country becoming weaker, groceries and services can increase in price, making life more expensive overall.
04 Savings and Investments
Whilst living abroad, you may still be saving or investing in your home country. Once you convert your savings, you may be left with more money, or less, depending on the given exchange rate.
05 Transferring Funds
Part of expat life means sending money home from time to time, and exchange rate fluctuations can mean that your recipients get less or more than expected.
Foreign Exchange Strategies
Currency-hedged funds are a great option for expats to reduce currency risk. These are a special type of investment fund - such as an ETF or mutual fund – which is designed to protect, or ‘hedge’ against the negative impact of fluctuating exchange rates.
These funds use financial tools such as forex, futures and options, to offset currency risk and reduce potential losses. This way, you can focus on the performance of the investments themselves without worrying about exchange rates.
However, these funds can be more expensive than traditional investment funds and they may limit potential gains.
Currency Risk Management for Expats
If you plan on retiring abroad, transferring your UK pension to an International SIPP or a Qualifying Recognised Overseas Pension Scheme QROPS is a great way to reduce your currency risk. Both solutions allow you to choose which currency your pension is held and invested in giving you the flexibility to align your pension pot with the currency you plan to retire in.
International SIPPs and QROPS offer an array of investment options across a range of markets and currencies, an opportunity to diversify your portfolio globally, which will hedge against currency fluctuations.
Other options include international investment products such as locally compliant bonds and offshore investment platforms, or international banks and companies such as Wise.com which allow you to receive, pay, transfer, and convert in multiple currencies.
Another option is to work with an FX provider, many of which allow clients to lock in future rates for transfers and offer expert advice and guidance. The Wealth Genesis works with a curated and trusted panel of experts who offer the best services tailored to expats.
Currency Risk Mitigation
As much as choosing a life abroad can be exciting and enriching, it may come with certain elements of uncertainty and risk. Thankfully, there are ways to minimise these risks when it comes to your finances.
The Wealth Genesis helps expats implement an overall strategy to protect their income, savings and investments when living overseas.
Let us alleviate the stress of currency risk in your life. To discover more, get in touch with us today here.
