Silly questions about foreign bank accounts

themoffster

Hi, silly question....

What is to stop someone opening a foreign bank account in a country with a high rate of interest? That way any bank account gets great payments on interest every year?

Why don't people do this? Obviously it is not straight forward as I seem to think it is or everyone would do it.

For instance an ISA here gets 2%, but the interest rate in Iceland (for example) is around 18%. Surely putting your savings in this country is a better idea (obviously watching out for the 'all eggs in one basket' paradigm) - the higher the interest rate, the more you get back in interest.

Aegis

Forex speculation is higher risk than most savers are willing to take. Says it all really.

dzug1

The more interest in krone maybe - but that could actually be less interest or even a loss when converted back to ££

themoffster

Aegis wrote: »

Forex speculation is higher risk than most savers are willing to take. Says it all really.

Hi, I'm not sure what you mean - could you explain it in Lehman's terms please? I'm not looking to do this as I am not a financial buff - I just thought of it when looking at interest rates and wondered why most people don't do it.

SeanW

You have £100 and you convert to say 1000 Icelandic Krone at an exchange rate of £1 = 10 Krone

After 1 year it's now worth 1180 krone, however, £1 is now worth 20 Krone. When you convert the Krone back to £sterling you have only £59.

Aegis

SeanW wrote: »

You have £100 and you convert to say 1000 Icelandic Krone at an exchange rate of £1 = 10 Krone

After 1 year it's now worth 1018 krone, however, £1 is now worth 20 Krone. When you convert the Krone back to £sterling you have only £50.90.

Exactly. Who knows where the currencies are going to be trading in a year?

KingL

themoffster wrote: »

...in Lehman's terms...

:T .................

themoffster

SeanW wrote: »

You have £100 and you convert to say 1000 Icelandic Krone at an exchange rate of £1 = 10 Krone

After 1 year it's now worth 1018 krone, however, £1 is now worth 20 Krone. When you convert the Krone back to £sterling you have only £50.90.

Ah ok. So basically it boils down to guessing the exchange rate of currency A vs currency B.

purch

Why don't people do this?

Exchange Rate risk !!!!

The main reason that you can get higher Interest rates in one particular currency compared to another is the risk that the currency with the higher Interest rate will depreciate.

If you look around the world, those economy's where you can get double digit Interest rates are the most unstable and usually the weakest.

You can always take the risk, and the higher interest rate you earn hopefully compensates for that risk, but if it doesn't you will lose out.

KingL

Also, you won't get the benefit of protection from the UK industry/government compensation scheme if they go belly-up.

purch

So basically it boils down to guessing the exchange rate of currency A vs currency B

There is no guesswork required.

The FX Market is far from a "perfect" market, so there will always be opportunities to profit from exchange rate discrepancies and times when you can benefit from Interest rates being either too high or too low for the actual exchange rate risk involved, but it is certainly not something to get involved in without a lot of research, understanding and knowledge.