So this has been a dilemma I have had since the budget for Europe got put together back in July of 2010. How do I contain the risks in currency fluctuations? So far, my approach has been to do nothing. However, this can be a costly mistake, a big rise in the euro could limit the availability of funds in Europe or worse force us to trim down the itinerary. Of all the currencies we will be using during our trip the Euro is by far the currency we will be exposed to the most, as illustrated below:
Currency % of Budget % of Time
Europe (EUR) 22.58 25.59
China (CNY) 7.74 7.06
Australia (AUD) 7.04 5.29
Japan (YEN) 2.89 3.24
Vietnam (VND) 2.17 3.24
I did buy some AUD back in July and so far the bet has paid off, but the fluctuation has been minimal so my gains have not been something to get too excited about. In regards to the other currencies, they won't make or break the trip if the currencies were to drastically appreciate against the dollar. Going back to the Euro, the way I see it I have at least three options:
Option 1: Buy Euros
I can buy Euros now and not worry about what happens with the currency when our European segment begins. By locking in the currency exchange rate now, I will eliminate the risk of the Euro appreciating against the Dollar.
Option 2: Shorting the Euro
There has been a lot of turmoil in the European Union recently, which has caused the Euro to fall to as low as $1.19 back in May of 2010. Things have recovered somewhat and the Euro now trades for about $1.30, but still far below its highs. Many things can influence the value of a currency, most of which are beyond my comprehension. What I do know is that if the Euro is expected to go down, then I might as well bet that it will.
Option 3: Do Nothing
By doing this I am only assuring myself of getting the second best result possible. If the Euro rises, I will pay more for things when we get there, but I won't lose money by shorting the currency. If the Euro falls to the dollar, I will pay less for items in Europe, but I won't benefit from having shorting it.
I am not an expert in this territory, but it has been something I have been thinking about for a while and I think I need to take action. I'm also sure there are more options than just three. If you have any insight as to what is going to happen to the Euro please give me a helping hand!