Foreign Currency Hedge for Vacation

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Rainier
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Foreign Currency Hedge for Vacation

Post by Rainier »

We are planning a return trip to Switzerland in February 2016. This year we had a bit of scare when the Swiss Franc jumped by 25%+ overnight and our vacation suddenly became very expensive. Although, with some negotiating and a recovery in the USD it wasn't that bad by the time we traveled in mid-February.

For 2016 do you think we should lock in our price and what's the best way to do it? We will likely confirm our hotel this week (but it is still cancel-able 30 days out with no penalty).

If I did hedge, the best options look be either buy CHF in my brokerage account (1% fee each way) or buy a CHF currency ETF ($8 commission each way, 40bps annual management fee, and subject to market mis-pricing).

My current thought it to do nothing until I buy my airline tickets. I am not committed to anything until then. If the CHF doubled I would just cancel my hotel and probably cancel the trip. The issue is after I purchase my airline tickets. Do I hedge, do nothing, hedge only a portion, ....? And if so, when.
TradingPlaces
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Re: Foreign Currency Hedge for Vacation

Post by TradingPlaces »

You are overthinking this.

Do you hedge your gasoline? Orange juice? Metal in the car? Heating cost?
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Cyclesafe
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Re: Foreign Currency Hedge for Vacation

Post by Cyclesafe »

You know this already, but make sure your credit/debit cards don't charge a foreign transaction fee. Use bank ATM's to get cash instead of exchange shops. Currency goes both ways and on average evens out. If you hedge, you'll always be out the cost of hedging.

Hedging is for speculators and for corporate managers who fear getting fired if currency goes the wrong way in significant transactions.
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Rainier
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Re: Foreign Currency Hedge for Vacation

Post by Rainier »

Thanks for the comments, probably best not to worry about it.
michaelsieg
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Re: Foreign Currency Hedge for Vacation

Post by michaelsieg »

I will go there with the family this summer and it will be more expensive than planned.
If you want today's exchange rate (i.e. you worry, that the CHF will increase in value), just buy the Swiss Franks now (or part of what you plan on spending).
I think many are betting on the CHF to get stronger. There are really not many reasonable SNB bond investments (negative interest rates), a lot of money is flowing in the Swiss market index. That is probably why the Swiss market exchange has nearly recovered from the initial steep 9% decline after the peg to the Euro was abandoned.
So a cheap long-term way to hedge would be to buy some USD denominated ishares ETF on the Swiss market or try to get some of the CHF denominated AAA bonds, like the ones that Apple has recently issued. Something like that could make sense for someone who plans to maybe retire or life there someday.
I hope you will have a great trip!
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Re: Foreign Currency Hedge for Vacation

Post by patrick »

I would agree that it is probably not worth the trouble to hedge this -- especially if the hotel is prepaid.

But if you wanted to, the simple solution of going ahead and exchanging for CHF cash now would probably have no higher cost than doing so later, assuming you were going to exchange cash at all that is. However, just like buying nominal CHF bonds, this will hedge against exchange rate changes but it won't hedge against CHF inflation. To be fully hedged you should instead buy Swiss inflation indexed bonds that mature at the date of travel in a quantity matching the amount you'll spend. However, I somehow doubt that it would be practical for non-Swiss investors to buy such a thing at a reasonable cost in small quantities, so I really don't think it's worth the trouble for a summer trip. If you do decide to retire there, however, then it might possibly make sense to do that sort of thing.
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Rainier
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Re: Foreign Currency Hedge for Vacation

Post by Rainier »

Hotel is not prepaid, but price is fixed so inflation not an issue. Assuming I could get a refund, pre paying the hotel now with my credit card would be the cheapest way to buy CHF.

CHF is almost back to where it was in January and SNB is doing everything it can to de value.
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sperry8
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Re: Foreign Currency Hedge for Vacation

Post by sperry8 »

michaelsieg wrote: If you want today's exchange rate (i.e. you worry, that the CHF will increase in value), just buy the Swiss Franks now (or part of what you plan on spending).l
+1, if you really are worried, just buy the Francs now. Easiest way to hedge.
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Rainier
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Re: Foreign Currency Hedge for Vacation

Post by Rainier »

I don't want cash, too expensive to obtain. And I don't want to hold it or bring it with me to Switzerland. But I can buy CHF in my brokerage account or the Swiss CurrencyShares ETF.
halfnine
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Re: Foreign Currency Hedge for Vacation

Post by halfnine »

Rainier wrote:I don't want cash, too expensive to obtain. And I don't want to hold it or bring it with me to Switzerland. But I can buy CHF in my brokerage account or the Swiss CurrencyShares ETF.
The CurrencyShares EFT would cost you -1.15% to hold (-0.75% for interest and -0.4% ER). And you would be out another 1% or so relative to if you had the money in a savings account instead.
obgraham
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Re: Foreign Currency Hedge for Vacation

Post by obgraham »

It's already outrageously expensive to visit Switzerland -- what's a bit more pain!
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Re: Foreign Currency Hedge for Vacation

Post by Bfwolf »

I agree that you're overthinking this.

What's a 90% confidence interval on currency impact to your trip vs today? Plus or minus $1,000? $2,000? Knowing it's 50/50 whether it could go in your favor or against you, is that really enough money for you to start in with hedging strategies?
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Rainier
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Re: Foreign Currency Hedge for Vacation

Post by Rainier »

obgraham wrote:It's already outrageously expensive to visit Switzerland -- what's a bit more pain!
Most things are but some aren't. Lift tickets and ski school for the kids is about half the price as in the US. And the scenery is incomparable.
TravelerMSY
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Re: Foreign Currency Hedge for Vacation

Post by TravelerMSY »

I can only add that you likely do not need to hedge the purchase of the air tickets unless you're buying tickets for travel within Switzerland.

I'd also suggest that hedging costs money long-term. I'm assuming you don't have a crystal ball that predicts the CHF/USD. I'd only bother to hedge under one scenario. That your Swiss vacation costs X in dollars now, and if it suddenly jumps to x+1 or more then you're cancelling the trip.
3Wood85
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Re: Foreign Currency Hedge for Vacation

Post by 3Wood85 »

I was shocked when I went to Zurich this past summer and lunch was equal to 40 USD and dinner was even more expensive haha. But the experience was great and it was a lot of fun, I will def be going back. The public transportation wasn't too bad though.
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