Locking the exchange rate for your Swiss franc to euro conversion, good or bad idea?

The recent drop in the euro against the Swiss franc has raised concerns for the Swiss economy, but at the same time has offered a significant advantage to cross-border workers. Indeed, this depreciation of the euro has created a favorable EUR/CHF exchange rate for converting Swiss francs into euros for their salary, thus increasing their purchasing power.

Following a recent rise in the EUR/CHF, sparking hopes of a return to euro-franc parity, the question of locking in the EUR/CHF exchange rate arises, so they can protect themselves against future fluctuations. But is this really a viable long-term solution for cross-border workers?

The Forward Exchange Contract

Before diving into the heart of the matter, it is crucial to understand what a forward exchange contract is.

Simply put, a forward exchange contract is an agreement between two parties to exchange one currency for another at a specified exchange rate on a future date. Unlike a spot transaction where the currency is exchanged immediately, a forward contract makes it possible to fix the exchange rate in advance, thus offering protection against market fluctuations.

The forward exchange contract provides exchange-rate protection for a predetermined period, usually between 3 and 12 months.

After subscribing to a forward exchange contract, the cross-border worker commits to their bank to convert their Swiss francs into euros monthly, according to the duration chosen for the contract. On the other side of the agreement, the bank undertakes to guarantee the same EUR/CHF exchange rate for each euro-franc conversion carried out during the agreed period.

What are the advantages of a forward exchange contract?

• Protection against a rise in the Swiss franc: The cross-border worker is certain to receive a predetermined amount of euros for their Swiss francs, regardless of how the foreign exchange market evolves.
• Budget stabilization: The fixed exchange rate allows for more precise financial planning and protection against market fluctuations.

Although this option may at first seem very advantageous, in reality, after more thorough analysis, this strategy can turn out to be more restrictive than it appears at first glance.

What are the disadvantages of a forward exchange contract?

• High bank margins: Banks generally apply margins of 1.5 to 2% on the interbank exchange rate (EUR/CHF), which can significantly reduce the amount of euros the cross-border worker receives.
• Loss of benefit if the Swiss franc appreciates: If the Swiss franc appreciates against the euro during the contract period, the cross-border worker loses the opportunity to benefit from a more favorable EUR/CHF exchange rate.
• Rigidity in the event of unforeseen circumstances: The contract is binding and cannot be easily terminated. In the event of layoff, illness, or other unforeseen events, the cross-border worker may be unable to meet the contractual obligations.
• Additional costs in the event of non-compliance with the contract: Penalty fees and interest may be applied if the contract terms are not fulfilled.

Practical example:

Let’s take the example of a Swiss cross-border worker who earns a monthly salary of 5,000 Swiss francs. He signs a forward exchange contract to convert 2,500 Swiss francs into euros every month for one year, with a fixed exchange rate of 0.9900 EUR/CHF.

Unfortunately, two months later he faces a layoff and finds himself unemployed. His unemployment benefits are then paid into his account in France in euros. (About 2,500 euros per month)

Consequently, he has to convert these euros into Swiss francs by transferring them from his French bank account to his Swiss bank account, in order to comply with the conditions of his forward exchange contract.

It is important to note that after this operation, the bank will make another CHF/EUR conversion to credit the funds back to his account in France in euros. This double conversion will therefore incur additional fees, with significant margins applied to each.

If the market exchange rate is 0.93 EUR/CHF, and his bank charges him an average of 2% on the first exchange, he will have to convert 2,747 euros at 0.91 EUR/CHF to obtain his 2,500 CHF.

However, if he is obliged to convert his 2,500 Swiss francs at the exchange rate agreed in his forward exchange contract (0.99 EUR/CHF), he will only receive 2,525 euros for his 2,500 CHF, i.e. a loss of 221 euros per month, or 2,210 euros over the remaining term of the contract.

This situation can lead to a significant financial loss, which could be amplified by a prolonged period of unemployment; emphasizing the importance of prudent financial planning for Swiss cross-border workers.

It is therefore essential for cross-border workers wishing to subscribe to a forward exchange contract to understand the resulting financial implications before committing.

Indeed, in the event of negligence or failure to meet contractual commitments, the consequences can be severe, especially if the Swiss bank account is at zero when the contract expires. Banks will attempt to automatically withdraw the amounts required to honor the contract. This practice will result in negative balances in the account, accompanied by substantial overdraft fees.

To guard against these unpleasant situations, it is recommended that cross-border workers only convert part of their salary as part of the forward exchange contract, thereby maintaining sufficient financial reserves to handle any unforeseen circumstances and to cover currency conversion costs. This prudent approach ensures responsible financial management and minimizes the risk of unexpected financial hardship.

III. Alternatives to the Forward Exchange Contract

Given the risks associated with locking in an exchange rate, it is important to explore more flexible alternatives better suited to cross-border workers’ needs. One increasingly popular option is using online exchange services. These platforms usually offer competitive EUR/CHF exchange rates and fast transaction execution, enabling cross-border workers to benefit from favorable conditions without the constraints of forward contracts.

Advantages:

• Competitive exchange rates: Online exchange bureaus display more competitive exchange rates than traditional banks. Indeed, thanks to a large transaction volume, they can afford to reduce their margins.
• Fast transaction execution: Currency conversions are generally completed within 24 business hours, ideal for cross-border workers needing to convert their Swiss francs to euros without traveling.
• Flexibility and adaptability: Online exchange services allow cross-border workers to convert one-off amounts or set up regular automatic transfers, depending on their needs. (while remembering to initiate the exchange request)
• No hidden fees or commitment: Most online exchange services are transparent and do not charge hidden fees. Moreover, there is no contractual commitment, allowing cross-border workers to cancel at any time.

That’s the case with Ben S. Digital Change. A simple, fast, and secure solution to ensure the EUR/CHF / CHF/EUR currency conversion for cross-border workers at the best exchange rate on the market, with no hidden fees or commitments.

Based on the same data, namely the 2,500 Swiss francs mentioned above, this cross-border worker would save 506.83 euros per year compared to traditional banks by using Ben S. Digital Change. If they were to convert their entire salary of 5,000 CHF, they would save 1,013.66 euros/year.

By remaining active within our loyalty program, Ben S. Digital Rewards, they would save an additional average of 300 CHF per year.

As a new customer, take advantage right now of an exceptional welcome offer: 125 CHF offered* on your first transactions with the code NEW125!