Sorry if this has been covered, but I didn’t find a thread. If you are an American family planning to send a student to study in the UK for 3–4 years, how do you deal with currency exchange risk? When we first started looking at universities in the UK the exchange rate was ~1.25 USD per GPB. We’re now at ~1.4 USD per GBP, and it could go worse. Obviously there’s a whole world of currency trading/hedging out there, but I’m wondering if there’s a simple strategy that families have employed specifically to protect against a major drop in the dollar’s value vs the pound over a 3-4 year horizon.
There’s an ETF with ticker symbol FXB that has pretty low expenses and tracks the USD-GBP exchange rate. So a simple strategy is to invest some fraction (up to 100%) of the expected cost of 3 years of uni in this fund, and you’ve locked in the exchange rate (partially or fully). But this assumes you have the money in-hand to invest, and it ties up the funds for that time. The more sophisticated strategy would be to use options or something leveraged. I hope someone has looked into this and can share wisdom here. Thanks.
St Andrews offers a.discount if you pay 4 years tuition upfront. I am kicking myself for not doing it.
The financial picture will be internationally rocky, I think next week might be an indicator, so don't assume anything.
I’m a Wall Street guy and I used the FXB to hedge the currency risk. Hedged roughly half of the cost. Once the student has their UK bank account set up, if you like the spot rate, you can also just use a service like Transfer Wise to send the funds. Took a 529 distribution on Jan 2nd this year and already sent those funds at spot to cover October’s tuition.
@HazeGrey I noticed on her tax return this year if she had more than 10K in a foreign account there was extra paperwork, so I think we will try to avoid that.
She is hoping ot work some next year, so getting paid in pounds for her spending money will be nice, as she just had to transfer some of the money she earned here to her account there and she was a little shocked at 1000 dollars transferring less than it did in the fall.
@HazeGrey Yes, FXB is straightforward. But I’m starting to look into options on XDB-I’m new to options. Options chains only go out for <1 year, so it’s not perfect. But I think this can be used as insurance to protect against large currency fluctuations for a reasonable cost, and it doesn’t tie up the bulk of the funds. If anybody has any experience with this, I’d be interested to hear your thoughts.
Another thought is to invest through a conventional US brokerage in “boring” UK companies (ADRs) that pay a good secure dividend. This would then be the equivalent of having the money invested conservatively (as opposed to tied up in FXB) and at the same time having the money effectively mirroring the USD-GBP exchange rate.
The downside of this (and FXB) is that it’s a losing investment if the dollar gains significantly against the pound, whereas the options hedge only risks the cost of the option.
@rocket88 All depends on your individual circumstances and tolerance for risk. From my perspective, I originally did my budget assuming a 1.30 exchange rate. I hedged the first two years with FXB and left the balance invested in US muni bonds with the thought that the after tax yield on the bonds would offset the potential annual appreciation in the Pound over the time horizon. Not a perfect hedge, but it worked for my budget and I was comfortable with the risk I retained. If you are only really concerned about a “worst case” scenario, then a lower cost alternative like options might work better for you. On your ADR idea, while there is a good correlation between the FTSE 100 and the Pound, that might be a bit too much basis risk for me.
@VickiSoCal Haven’t done 2017 taxes yet, but that’s what accountants are for!
I have a somewhat similar situation with a daughter at university in Canada (we live in the US, but pretty far north and east and thus not all that far from eastern Canada). I have found two simple ways to hedge against currency fluctuations. Since the Canadian dollar is quite low right now, I have chosen to hedge a bit.
One way is to go to a local (US) financial services company, and buy Canadian bonds. I would expect them to also have UK bonds although I didn’t think to ask.
The other way is to just get a bank account in Canada and transfer the money early. This does mean extra paperwork on my tax forms, but I have an accountant to do that (the complexity of taxes is currently way beyond what I could handle). Whether the banks in the UK will let you do this probably depends upon UK laws.
To update this: Although currency trading with futures and options is a huge business, it seems difficult for an individual to get involved in this, and also complicated. However, you can buy options on ETFs, same as options for individual company stocks. So with a slight upgrade to my regular brokerage account, I got approved for options and bought slightly out-of-the money call options on FXB. These are available at various expirations, currently out to Jan 2019. So for example, you could buy 1 contract of the January 19 2019 expiration calls @140 for 2.95 today. This means you would pay $295 dollars up front, and then you have the option, at any time up till Jan 19 2019, to purchase 100 shares of FXB at a price of $140/share, no matter what the open-market price is. In other words, you’re “protecting” $14,000 worth of GBP at a cost of $300, or about a 2% cost. 3 or 4 contracts will protect a year’s worth of tuition+ accommodations+ expenses roughly.
If the pound loses value versus the dollars, you let the options expire–but you’re happy because that means your tuition payments is cheaper in dollar terms. If the pound appreciates versus the dollar, then your options will go up in value, and you then sell them when you feel the time is right, or you can hold till the expiration and exercise the option and take the shares of FXB purchased at $140/share.
Note that this hedging strategy ends up costing more than “not hedging” as long as the price of FXB doesn’t go above $143. Above $143, you save money. And you can’t lose more than the cost of the option ($295).
This covers you out to Jan 2019. To hedge farther out, you would need a more complicated strategy–e.g. front-loading options purchases now, or buying options each month/quarter as they become available, etc. Or any of the other strategies mentioned in this thread.
If you buy farther out-of-the money options, the cost is lower (e.g. Jan 19 2019 expiration calls @145 are 1.75), and it means that you’re willing to accept a wider float in the exchange rate before requiring “protection.”
Note: the price of FXB is pegged to the USD/GBP exchange rate, but it’s not exactly the same numerically (right now FXB is 135.63, while the spot rate for USD/GBP is 1.40. My guess is they were numerically equivalent at the inception of the fund, but because you pay about 0.5% in management fees per year, there is erosion of the FXB price relative to the spot rate.
Note: I’m not a professional, I haven’t even personally seen this strategy through myself, so do your own research before acting on any of this.
@VickiSoCal - St. Andrews is one of the universities we’re looking at with our daughter for 2019 entry. I didn’t know about the tution discount - how much is it?
Also, I’ve seen other people comment that the cost of attending St Andrews is similar to attending a UC in-state (which is what we are) but I just don’t see how the two compare. St Andrews seems A LOT more expensive IMO. Can anyone explain?
Thanks
D1 is a senior. There is no tuition discount that I know of, although I have heard if you pay all 4 years upfront might yield something, I think same rate all 4 years, but don’t quote me on that. International tuition around GBP 17k higher if course uses labs GBP 21k, housing and meals call it 6k x FX rate 1.40, so between $32-$38k. Is that competitive with UC instate?.
@elguapo1 Thanks.
From the university’s website: https://www.st-andrews.ac.uk/students/money/internationalstudents/ugcoa/
They are estimating around $49K for an American undergrad - a quick look at Berkeley for 2018-2019 is estimated at $33-$35K (or $31 if living off campus).
I’d say an additional $15K or so per year or $60K overall is not really competitive…
At the time we were comparing laat spring exchange rate was 1.25
tuition 20,700, room and board 5800, for 2017-2018
So 33,125 for tuition room and board.
Yep they have max tuition rate and hall fees at $38k. The rest you are going to incur where ever you are and are mostly made up of 1 offs, perhaps not the flights. $60K !!! Do you really think you will incur an extra 22k above tuiton and board. Its Scotland, I dont think you can spend an extra 22K ! Kiddo has never bought a book since she was there, never needed to its all in the libraries and she has had the same computer all through college. She gets by on about $6k pa spending money and that includes 2-3 European trips in the academic year.
That sounds like room and board has increased from 5800 to 8170 GBP in one year. That is a lot.
I am looking in detail at the costs because we are seriously considering the university and I’m trying to gauge just how realistic these ‘estimated’ costs that you see online really are so thank you for replying!
If they are close, I’m going to have to think long and hard about whether a degree that could end up being $60K or so more than one from a UC is worth it…
@elguapo1 - yes $60K. The numbers are right in front of you. Click on the links:
https://www.st-andrews.ac.uk/students/money/internationalstudents/ugcoa/
https://financialaid.berkeley.edu/cost-attendance-2016-17
$39K for tution and catered residence alone. Without spending anything else. Berkeley is $28,510. for tution and catered residence.
$10,490 more expensive at St. Andrews x 4 = $41,960 more expensive overall for just the tutiton and board alone.
Those numbers do not include all the extras - ($5K per year)
Mine has had very few extras. only 2 books. not much to do in St. Andrews to spend money on. 
D’s first year tuition fees GBP 15.7k x $1.50 = $23.5k, Last years fees $17.8k x 1.30 = $23.14 k so over the past 4 years in USD terms tuition actually went down. @scratchy903 $60k pa at ST A’s is no where close the cost. You have two parents here, myself and @VickiSoCal telling you the reality, it is absolutely your right not to believe us. Good luck with UCB.
Standard catered double is 6021 GBP for 2018-2019