Exchange rates - like everything else - have been fluctuating wildly since the Iran war started.
The pound is down sharply against the US dollar (and thus also the other currencies that are pegged to the dollar) but up nicely against the Euro. But between now and the summer holidays, who knows what could happen.
The cost of your flights and accommodation is only half the story when it comes to budgeting for your summer holiday. Many of us spend as much, or even more, when we actually get there.
When you’re abroad, the cost in pound terms of everything you buy - from meals out to taxis and daytrips - is determined by currency exchange rates.
One way to make your holiday money stretch further by using a hack that currency traders use, called hedging.
What is hedging?
It’s a common strategy among experienced traders.
They might buy a big stake in a company on the stock market, but also place a smaller bet on the same company’s shares tumbling - a bit like an insurance policy.
In this case the experts are suggesting you hold onto one asset (your pounds) rather than turning them all into another currency in one go.
How do you do it?
Professional traders would go “short” an asset, which is a bet that it would fall in value.
In this instance, hedging costs you nothing, uses good old-fashioned cash and you don’t need to be a financial whizz - you just need to plan properly and decide how much you want to spend during your holiday.
Once you’ve booked your trip, exchange half the amount you’ve budgeted for spending money into the currency used in your destination.
Rates vary wildly between travel money providers, so do shop around to find the ones near you with the best rates.
By changing half your spending money now, you will ensure you won’t lose out on this half of your budget if the exchange rate moves against you in the coming months. And by taking cash, you can be sure your money will be accepted everywhere: cash is still king in many countries.
Simon Phillips, managing director at No1 Currency, said: “Exchange rates fluctuate even in normal times, but when global events are as uncertain as they are now, they can move up or down very fast. This can work in your favour if the pound rises compared to the currency used in the country you visit, but if the pound falls sharply it will cost you dearly.
“Since the Iran conflict started, the pound has fallen by 2 per cent against the US dollar. If this trend were to continue, the drop could reach 10 per cent by summer - meaning everything in America would cost you 10 per cent more to buy than it does now. For a family of four heading to Disney World this summer, who might spend £1,500 in a week, that’s an extra £150.”
A day or two before you travel, that’s the moment to exchange the remainder of your spending money - but don’t leave it to do at the airport, which offers the worst deals.
If rates have improved in the intervening time, you’ll pocket the difference. Equally, if rates have worsened, you’ll have limited your exposure by exchanging half of your money at today’s more favourable rate.
How much could you save?
Here's a simple worked example, based on today's USD exchange rate of $1.33 to the pound and a hypothetical July rate of $1.215 (which is 10 per cent below the rate on the day the war started).
If you changed your full spending money budget of £2,000 in July at the $1.215 rate you'd get $2,430.
If you instead follow this hedge strategy - changing half now and half just before you go - you would get $2,545 - an extra $115 to spend.
Matthew Beck, chartered financial planner at Smith & Pinching, says: “A summer holiday is an important part of most people’s annual calendar, something to look forward to. But it’s also considered discretionary spending: something you pay for because you want to, not because you have to.
“We always encourage clients to plan for larger discretionary spending items several months in advance, saving up for them rather than paying for them out of their monthly budget. That way you’ll be less impacted by market conditions or exchange rates at the point you want to spend the money.”
Key considerations and when not to do it
Unless you’re a whizz at mental arithmetic, when you’re in a foreign country it can be hard to work out what you’re spending in pounds and pence.
If you use your UK debit or credit card to pay for things, you may be charged the sterling equivalent at the day's exchange rate - but of course you won’t know how much this is until the payment has gone through.
Many banks charge you to spend overseas on your card and there may also be hidden transaction fees added on as well, so the only way to be sure that the price you see is what you’ll pay is to use cash.
It's probably not worth looking to hedge if you're travelling imminently, however. The benefits of hedging accrue as exchange rates move steadily over time, so doing so over a day or two isn't really long enough for it to make much difference. With good planning, however, it could save you a significant amount.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
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