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Old 14-06-2017, 09:00   #1
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Buying new boat: dealing with currency fluctuation during process

Here is a situation that sounds quite scary to me.

Assume you are a US buyer financing a French boat via a US bank. Further, assume the following:

1. Place order for new French cat that costs 500K Euros on day 1 with 10% paid to manufacturer as build deposit. The exchange rate on day 1 is 1.15. So the deposit was $57,500USD. There is 450K Euro balance (or 517K USD at today's exchange rate).

2. The balance in Euros is due 8 months later when the boat is ready. Because of this, and assuming you are financing the boat with 20% down, the loan closing in euros is not due until the day the balance is due. Because you are working with a European dealer, there is no such a thing as locking the USD price at the time of the deposit. It is all Euros.

3. Eight months after the deposit when the balance is due, the Euro has taken off because the USA is falling apart and the exchange rate is now 1.40. In that case, the USD price of the balance is $630K drastically higher than initially planned and drastically changing the metrics that make the purchase worth it.

Options:
1. Take the currency fluctuation risk and walk away prior to closing if the Euro takes off. This means losing your 50K Euros deposit.

2. Get the full loan and make the full payment when placing the order, thus locking the USD exchange rate and thus eliminating the currency fluctuation risk. However, this also means paying mortgage payments on a loan for a boat that has not been delivered, which the bank may not accept.

Is there any other option that I am missing?

Thanks.
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Old 14-06-2017, 09:51   #2
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Re: Buying new boat: dealing with currency fluctuation during process

Need to add an option I just found out: get forward cover insurance at the time of boat order to lock the exchange rate for the balance amount. I'm researching for the cost of such forward cover insurance.
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Old 14-06-2017, 09:58   #3
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Re: Buying new boat: dealing with currency fluctuation during process

I guess it's like the stock market, roll the dice. If you think the rate is currently great, pay 90% up front. If you do and they go bankrupt, you lose a lot.
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Old 14-06-2017, 10:08   #4
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Re: Buying new boat: dealing with currency fluctuation during process

Create an escrow account with French Bank in euros now?
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Old 14-06-2017, 10:15   #5
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Re: Buying new boat: dealing with currency fluctuation during process

I know nothing about this (I'm sure someone on here does), but isn't there a foreign exchange/futures market where you can buy the euros (or an option/contract on them) now? That way, if the euros take off, you make money; if they tank, you've still got the price of the boat.

I suspect it may not be that simple.
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Old 14-06-2017, 10:39   #6
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Re: Buying new boat: dealing with currency fluctuation during process

1) Ask for the price in Dollars. For $500k, they will find a way.

2) Escrow account in an EU bank, dealer should be able to help if they want the sale.

3) Watch the market and if you see a substantial move start, transfer the money to euro to limit the risk. The biggest drop ever for the euro took around 8-10months. It wasn't an issue where it dropped from 20% in a day.

4) Cry when the euro craters and your $500k boat could have been had for $400k.

As long as you are comfortable they will be in business, what are you losing by paying up front. 8 months isn't going to net you a lot of investment return unless the money is in something that is subject to similarly large losses. Heck, ask if they have a discount for paying in full in advance. If they will knock 5% off, that's guaranteed return.
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Old 14-06-2017, 10:46   #7
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Re: Buying new boat: dealing with currency fluctuation during process

There are as many ways to do this as anyone can dream up, assuming you find a market for what you dreamed.

Your "forward cover insurance" may be the "cheapest" way, or purchasing the Euro now in a large US bank/brokerage. You don't necessarily have to do all of the remaining balance. Depending on how comfortable you are, you could do part of the remaining balance.
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Old 14-06-2017, 12:08   #8
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Re: Buying new boat: dealing with currency fluctuation during process

Anybody that believes the US is falling apart and the exchange is going up to 1.40 should put their money where their politics are and convert that US$ to Euro at 1.12 TODAY! What better way to save a fortune on a boat?
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Old 14-06-2017, 12:42   #9
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Re: Buying new boat: dealing with currency fluctuation during process

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Originally Posted by Tetepare View Post
Anybody that believes the US is falling apart and the exchange is going up to 1.40 should put their money where their politics are and convert that US$ to Euro at 1.12 TODAY! What better way to save a fortune on a boat?
Ha ha. The hypothetical was not intended to be political but from a pure risk mitigation perspective. A worst case scenario type of event. I am pretty sure the US will be fine, but I need to keep in mind that most Europeans did not see the Euro's 30% drop in 2014 coming.
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Old 14-06-2017, 14:07   #10
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Re: Buying new boat: dealing with currency fluctuation during process

If you have an account with a major brokerage, like Schwab, call them up and purchase a futures contract to hedge the exchange risk. They will have an expert available to setup the purchase and it won't cost much.
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Old 14-06-2017, 14:28   #11
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Re: Buying new boat: dealing with currency fluctuation during process

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If you have an account with a major brokerage, like Schwab, call them up and purchase a futures contract to hedge the exchange risk. They will have an expert available to setup the purchase and it won't cost much.
Yup, this is what I'm considering. The issue is that most traditional futures contract both parties are obligated to the exchange, so I will be crying when I need to buy 400K euros at 1.12 when the actual market is at 1.04

I was also told about more traditional currency risk insurance (or option) where I pay an amount for a guaranteed rate but I am not obligated to exercise the option. If comes next year and the euro is at 1.04 I would simply let the option expire and lose the insurance amount. But then I would buy the euros in the open market for 1.04. I'm exploring this.
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Old 14-06-2017, 14:33   #12
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Re: Buying new boat: dealing with currency fluctuation during process

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Originally Posted by BlueBuddha View Post
Yup, this is what I'm considering. The issue is that most traditional futures contract both parties are obligated to the exchange, so I will be crying when I need to buy 400K euros at 1.12 when the actual market is at 1.04

I was also told about more traditional currency risk insurance (or option) where I pay an amount for a guaranteed rate but I am not obligated to exercise the option. If comes next year and the euro is at 1.04 I would simply let the option expire and lose the insurance amount. But then I would buy the euros in the open market for 1.04. I'm exploring this.
You want to win, but not allow the possibility to loose For that you need to pay someone else to take the risk. The exchange broker can give you the tradeoffs. You aren't hedging over a long period or with huge, in financial market terms, amount, so it should not be that expensive.
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Old 15-06-2017, 10:04   #13
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Re: Buying new boat: dealing with currency fluctuation during process

If you buy EUR outright on a forward contract the bank will probably ask for 10% initial margin and you would be subject to Variation Margin if the fluctuations go against you and the initial 10% is used up.

As you say , you could buy a Call Option, pay the price for the Call which is a function of volatility and the length of the validity and then let it expire without exercising the option if the market moves in your favour. This avoids the problems of variation margin.

Alternatively, make it really simple, convert yr USD into EUR at the bank where you are doing the financing, and leave it in a EUR account at your bank earning a little interest. That way, your bank will not be worried about the financing risk since they will still be sitting on your money. It only becomes a risk for them once you pay the builder and set up your mortgage.

Then all you need to worry about is Flag, Registration and the EU Value Added Tax. If you do not know the rules for a US-flagged boat in the EU ask Kenomac who is sometimes a contributor to CF since he has his US-flagged Oyster here in the EU. He knows how the rules would apply in your case.
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Old 15-06-2017, 11:48   #14
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Re: Buying new boat: dealing with currency fluctuation during process

Clearly, "they" prefer you to absorb the risk, and vice versa. Since they are in a much better position than you to absorb it or lay it off on someone else, you can make the offer in, say, ounces of gold, or Swiss francs, or rounds of genuine Cheddar cheese, which you can buy or finance at today's prices, and then transfer to them when the time comes. Of course all of this all can be done on paper and by contract so the details are not a problem; just the cost of the transaction and the right risk taker. Most have had it right since BlueBuddha and valhalla360.
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Old 15-06-2017, 11:54   #15
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Re: Buying new boat: dealing with currency fluctuation during process

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Clearly, "they" prefer you to absorb the risk, and vice versa. Since they are in a much better position than you to absorb it or lay it off on someone else, you can make the offer in, say, ounces of gold, or Swiss francs, or rounds of genuine Cheddar cheese, which you can buy or finance at today's prices, and then transfer to them when the time comes. Of course all of this all can be done on paper and by contract so the details are not a problem; just the cost of the transaction and the right risk taker. Most have had it right since BlueBuddha and valhalla360.
Ha. I offered to pay in Bitcoins because it's more stable than the Euro but they didn't think it was funny. Cheese, however, now we are talking!
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