The price fluctuations on the international financial markets do not stop at the foreign exchange market. This has a direct impact on foreign currency loans. Foreign currency loans are now riskier than ever while hedging is more expensive than ever.
Foreign currency loans offer, according to their supporters, two advantages. On the one hand, borrowers can borrow in a currency with low interest rates and switch to another currency whenever the interest rate level changes (in the jargon “switches”). On the other hand, the foreign-currency loan offers the chance of a speculative gain: If the lending to the income repayment is devalued, the debt burden decreases without any need for amortization.
Of course, this medal has two sides.
If the exchange rates develop to the disadvantage of the borrower, severe losses threaten. In recent weeks, the risk potential was particularly evident in the Swiss franc.
At the beginning of July, 0.80 euros were paid on the foreign exchange market for a Swiss franc. As investors around the world fended off the Swiss franc as a safe haven due to fears of recession and national bankruptcy, Switzerland’s Eidgenese currency appreciated massively. At the peak, it had to pay almost € 1.00 for one franc in mid-August , That equates to an increase of 25 percent in a few weeks.
Foreign currency loan of € 300,000
In figures, this means that anyone who procured a foreign currency loan of € 300,000 at the beginning of July took out a loan of CHF 375,000 and exchanged the money for the euro to finance a property or to extinguish an expiring credit. Within a few weeks, the euro balance of the loan account increased from 300,000 to 375,000 euros.
Borrowers can hedge against unfavorable exchange rates in the financial market. This is z. This is possible, for example, with conditional futures (essentially options and warrants). The price of these instruments includes the implied volatility of the markets. The stronger the markets fluctuate, the more expensive the hedge becomes. The hoped-for advantage of a lower interest rate then quickly disappears.
Borrowers should, in view of the potentially continuing conditions on the financial markets, examine particularly thoroughly whether the risk assumed matches their own ideas. In principle, every currency could be subject to strong fluctuations in the coming years. This is not least caused by the central banks, which have flooded the financial system in recent years with vast amounts of liquidity, which is now (also) used speculatively.
Those who see more opportunities than risks in fluctuations should think about a basket of foreign currencies instead of a single loan. Instead of a CHF loan, z. For example, if five loans are used, 20% of the total funding will be in GBP, USD, CHF, JPY and AUD.