Exchange rate risk, also known as currency risk, is a risk related to the impact of exchange rate fluctuations on the value of a benefit settled in a foreign currency.

Of course, it can also be related to profit, but most often we talk about it in the context of the probability of loss caused by the weakening of the national currency.

Its reduced value increases the exchange rate of foreign currencies, which means that for a given number of units of foreign currency we are forced to pay the increased value of domestic monetary units, in our case USD.

Impact on loan installment

Exactly the same assumption applies to loans taken out in foreign currencies. When granting a loan, e.g. in USD, its value is converted from USD to the appropriate number of USD according to the exchange rate applicable on the date of signing the loan agreement.

The amount of each installment, although paid in USD, is also converted into USD, and the increase in its exchange rate results in a corresponding increase in the installment paid in USD. The situation of borrowers with Swiss franc commitments contracted in 2008 was painfully reminded of the exchange rate risk and the drastic change in the exchange rate.

At that time loans of this type were not only easily available, but also very popular among borrowers, and the franc exchange rate was about USD 2.2. For example, its average exchange rate according to Good Finance on January 2, 2012 was USD 3.6668.

This resulted not only in a corresponding increase in the loan installment, but also in its entire value – for example – at the beginning of 2008 the bank lent us 220 thousand. USD, or 100 thousand francs, January 2, 2012, despite the timely repayment of installments, the value of the loan increased to about 350 thousand. USD, which on that day we would have to pay back to the bank to get rid of the obligation in franc.

When to convert?

At the same time, it would be a very inappropriate term for currency conversion of a loan, because its value converted from francs to USD would be just 350,000. Consequently, the decision to convert the loan should only be taken into account if the exchange rate approaches its rate on the day the loan agreement is signed.

Strengthening the domestic currency will cause a decrease in foreign exchange rates, and thus cause that changing the currency of the loan to USD will not only deprive us of currency risk in the future, and may even prove beneficial. This will happen if the exchange rate from the day of the conversion is lower than the rate from the day of signing the loan agreement.

In this case, it should also be taken into account that some banks charge an additional commission related to currency conversion.

Set as a percentage of the outstanding loan

Its amount is set as a percentage of the outstanding loan. However, at present, an increasing number of banks charge it only in the event of a change from USD to foreign currency.

We will not pay for currency conversion into USD, e.g. in the case of a housing loan at GFIC and Good Finance, as well as a mortgage loan at Good Finance or GBank.

According to the above, the only right solution for people who are not able to come to terms with currency risk is a loan in the national currency deprived of it – we earn in USD and in USD, we repay the installment of a strictly specified amount.

This makes our portfolio not only more transparent but also enables accurate forecasting of the ratio of earnings to expenses in the future.