Letter: Advice on How Hedge with Foreign Currencies

Mr. Rawles,
You recently mentioned that you had bought some Swiss Francs, as a hedge. Back 15 years ago, I knew that the Yuan–the Communist Chinese Currency–was being held at about 1/4 (or less) of it’s real value.  I wanted to trade some US currency  into it, but couldn’t figure out ho, short of flying there and filling up a suitcase.

I think many of your readers would like to know how to do currency trading.

Today, I’d like to buy some British Pounds as I think the UK exiting the EU [the recent “Brexit”] will only make England’s currency stronger.

Thanks, – Dan E.

JWR Replies: For large currency trades, you can of course execute a FOREX trade, through a brokered contract.  But for small currency exchanges, the easiest way to buy foreign currency is simply to go to the international terminal of the nearest large airport, and visit a currency trading booth operated by Travelex.  Their currency trading rates are usually better than those available at your local bank.  But be advised that it is best to phone ahead, to be sure that they have the particular currency that you need on hand. (They will almost always have Euros and Canadian Dollars on hand, but don’t expect them to have Swiss Francs or British Pounds at all times!) You simply hand them U.S.  currency, provide them identification (they are accustomed to using passports for ID, so bring yours), and they hand you the foreign currency and a receipt that itemizes the currency trade.  Unstructured transactions under $10,000 can be made with no reporting.  Travelex also does transactions via Internet mail order, but it is less private, more costly (for postage and insurance on orders LESS than $1,000–they cover the postage on large orders), and there is course the risk of theft from the mail.   Travelex has around 200 “store” locations around the United States, mostly at airports and a few downtown offices in some major cities.

I generally prefer holding physical (printed) currencies, but you can open a foreign currency account through EverBank. Their main account offering for foreign currencies is called a “ World Currency Access Deposit Account.” They have a $2,500 minimum opening deposit.

If you keep any money in your PayPal balance, you can also add another currency to your account.  Click on “Money”, and then click on “Manage Currencies”.  Then click on “Select New Currency”.  In the pull down menu select the currency of your choice, such as Swiss Francs (for this example).  Once that appears in your currencies list,  you can then type the amount (in Dollars) that you want to exchange in the Currency Exchange “From” box, again select Swiss Francs in the right-hand pull-down menu, then click “Calculate” and then the “Continue” button.  Their exchange rates are competitive. After you approve the exchange, it is completed automatically. It is that quick and easy.  Your account will then show the individual currency amounts plus an aggregate available balance in U.S. Dollars.  But be advised that each time you exchange currencies, there are transaction fees charged!  So it is best to “park” that portion of your money in Swiss Francs and not touch it, unless you mail order something from Switzerland.  In the long term, once your “hedge” currency has risen substantially against the U.S. Dollar, you can exchange it back, hopefully for a handsome profit.  I haven’t checked, but it might also be possible to make a transfer of foreign denominated funds from PayPal to a EverBank World Currency Access Deposit Account, without making a currency exchange transaction.

One other option is to buy travelers checks denominated in foreign currencies at your local bank, but those would probably be more suspect in later transactions than the currencies themselves. And, as previously noted, the exchange rates are generally not favorable at most banks.

If you buy currency when traveling abroad be advised that there are customs declarations required upon your return.  Also note that private trading of currencies with the citizenry is illegal in some countries, including among others (at my latest recollection) India, Israel, Malaysia, and South Africa. Be sure to check on local laws before trading currencies. Also, be advised that here in the United States, Currency Transaction Reports will be made any time that a transactions or “structured” series of transactions exceeds $10,000 USD.