Glossar

A foreign exchange risk management strategy or program is a set of procedures that allows a company to achieve its goals in terms of managing currency risk. It is based on the business specifics of the company, including its pricing parameters, the location of its competitors, the weight of FX in the business. A foreign exchange risk management strategy or program also takes into account the company’s sources of information, IT systems, degree of cash flow visibility, and key decision makers (their risk tolerance, their familiarity with different risk management styles, etc. Once the program is established, a particular FX solution —with partial or complete automation of the processes involved— can be implemented.

A foreign exchange short position in FX forward markets is a commitment to sell a specified amount of one currency against payment in another currency at a fixed future date, known as the value date, at a specified exchange rate. Typically, a foreign exchange short position offsets a corresponding ‘long’ position that a company takes when it agrees to sell goods for delivery at a future date. In effect, such a foreign exchange short position enables the company to convert a long underlying position to a zero net exposed position, with the forward contract receipt cancelling out the corresponding account receivable.

A foreign exchange FX swap is an exchange of debt-service obligations denominated in one currency for the service on an agreed-upon principal amount of debt denominated in another currency. By swapping their future cash-flow obligations, the counterparties are able to replace cash flows denominated in on currency with cash flows in a more desired currency. A company borrowing in GBP at a fixed interest rate can convert its debt into a fully hedged USD liability by exchanging flows with another company with the opposite need. At each payment date, the company will pay a fixed interest rate in USD and receive a fixed rate in GBP. Unlike interest rate swaps, where no exchange of principal takes place, foreign exchange FX swaps include the exchange of principal amounts at the start and at the end of the agreement. Depending on the nature of the corresponding interest rate payments —at a fixed or floating interest rate—, currency swaps can be arranged as ‘fixed-for-fixed’, ‘fixed-for-floating’ or ‘floating-for-floating’.

A forex trading platform is a portal or software interface that allows customers to trade currencies with execution in all major FX instruments, including spot, forwards, NDFs, limit orders, options and swaps. Forex trading platforms provide liquidity through a single dealer (single dealer platform) or multiple dealers (multi-dealer platforms). Forex trading platforms advertise their capacity in terms of displaying transparent pricing, complying with best price execution requirements and providing trade history. Leading forex trading platforms targeting corporate clients offer seamless integration to Treasury Management Systems (TMS) with Straight-Through Processing (STP). Currency Management Automation solutions integrate forex trading platforms, providing connectivity between the ERP/TMS and forex trading platforms in order to automate FX hedging and distribute risks among multiple banks.

A forward contract, in the context of foreign exchange, is a contractual agreement to buy or sell a specified amount of one currency against payment in another currency at a fixed future date, known as the value date.The exchange rate is fixed at the time the contract is entered into. A forward contract effectively ‘locks in’ today’s exchange rate, plus or minus the forward points, i.e. the difference between the forward and the spot rate due to interest rate differentials between currencies. An open forward contract, the funds can be exchanged before the value date. By contrast, when both parties are legally obliged to exchange the funds on the value date, the forward contract is said to be’ closed’ or ‘standard’.

A forward contract opportunity profit exists when the value of a long (short) forward position increases (decreases) prior to contract expiration, reflecting a shift in the underlying spot exchange rate. A speculator might take the opportunity profit and close out the position. However, closing out a forward position taken as a hedge would leave the underlying exposure unprotected. When forward points are not favourable and the firm tolerates some degree of deviation between the budget rate and the spot rate at the time of setting the budget, the budget can be hedged with conditional orders—’take-profit’ if currency markets move in the firm’s favour, and ‘stop-loss’ if markets move against. This program allows the firm to protect a ‘worst-case scenario’ budget rate while delaying hedging as much as possible and still allowing it to profit from possible favourable market moves.

The forward element is a concept introduced by the IFRS 9 standards for general hedge accounting and defines the forward points of a forward contract, to distinguish it from the spot element of the contract. Forward points are the basis points added to or deducted from the current spot rate to determine the forward rate at which the forward contract will be settled on the delivery date. These forward points result from the difference between the interest rates of the two currencies and the duration of the contract. One of the changes under IFRS 9 is the possibility of excluding it from the designation of a forward contract as the hedging instrument and accounting for it as costs of hedging.Under IFRS 9, companies can store the forward element in other comprehensive income (OCI). Changes in the fair value of the forward points, thus, will not affect the profit and loss, thereby increasing the effectiveness of the hedging relationship and mitigating income statement volatility.

A forward exchange rate is the agreed-upon price at which two parties commit to exchanging one currency for another on a specified future date.

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How Forward Exchange Rates Work

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Unlike the spot exchange rate, which applies to currency transactions executed for immediate delivery, a forward exchange rate allows businesses to fix a guaranteed conversion rate today for a settlement that occurs weeks, months, or years ahead.

Contrary to a common misconception, the forward exchange rate is not a prediction of where the spot market will trade in the future. Instead, it is calculated using the current spot rate adjusted for the interest rate differential between the two currencies over the agreement's maturity period. This adjustment is referred to as the forward points (or a forward premium or discount).

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The Calculation Formula

Forward Rate = Spot Rate × [(1 + (r_quote × t)) / (1 + (r_base × t))]

Where:

• r_quote = Short-term interest rate of the quote currency
• r_base = Short-term interest rate of the base currency
• t = Time to maturity (expressed as a fraction of a year)

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Understanding Premiums and Discounts

• Forward Premium: Occurs when the foreign currency's interest rate is lower than the domestic interest rate, resulting in a forward rate higher than the spot rate.
• Forward Discount: Occurs when the foreign currency's interest rate is higher than the domestic interest rate, resulting in a forward rate lower than the spot rate.

By locking in this rate via a forward contract, corporate finance teams eliminate the variable of currency volatility between the trade date and the settlement date.

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Why Forward Exchange Rates Matter to Corporates

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For CFOs and corporate treasurers managing foreign currency receivables or payables, unpredictable spot exchange rate movements present a direct threat to profit margins. Operating without fixed rates leaves budget targets vulnerable to market swings.

Utilising forward exchange rates offers key strategic advantages:

• Budget Certainty: Enables finance teams to establish fixed commercial prices and protect cash flow targets.‍
• Margin Protection: Ensures that the profit margin agreed upon at the time of a commercial sale or procurement contract is preserved at execution.‍
• Financial Forecasting: Provides precise, predictable figures for treasury planning and financial reporting.

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How Kantox Automates Forward Exchange Rates

While forward contracts effectively mitigate market risk, manually monitoring market rates, calculating points, and placing forward trades across multiple currency pairs creates heavy operational overhead.

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Kantox simplifies this process by integrating automated currency management directly into your ERP or treasury systems. Through software like Kantox Dynamic Hedging®, businesses can automatically capture exposure, compute forward exchange rates in real time, and execute micro-hedges instantly as sales or purchase orders are generated. This automated workflow removes manual execution friction while maintaining strict policy compliance.

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To see how automated forward rates can protect your margins, explore Kantox Dynamic Hedging®.

Forward points express the difference in price between currency rates for two different delivery and payment dates, usually spot and forward (although it could be two forward rates with different maturity). Forward points mainly reflect the interest rate differential between two currencies as reflected in the Interest Parity Theorem. They are expressed in pips. Forward points play an important role in pricing and in FX hedging. They are said to be ‘in favour of’ (‘against’) a firm that sells (buys) in currencies that trade at a forward premium and/or buys (sells) in currencies that trade at a forward discount. Hedging with currency forwards allows firms to ‘capture’ the financial benefit of favourable forward points. If forward points are ‘against’, a variety of automated hedging tools and programs can help mitigate their impact by delaying hedging as much as possible.

The forward point premium is the additional value of a given currency against another, when the forward and spot rates are compared. For example, if spot JPY-USD is 0.009189 and the corresponding 180-day forward rate is 0.009360, JPY trades at a 171-point premium. The forward premium can also be calculated in percentage terms. In this case, the annualised 180-day JPY premium is 3.72% = [(9360-9189)/9189] x 360/180. The forward premium reflects the interest rate differential between USD and JPY. In this example, short-term interest rates are lower in JPY than in USD, which explains the forward premium of JPY. The forward rate makes it impossible for arbitrageurs to take advantage of interest rates differentials without risk.

A full convertible currency is the monetary unit of a country where holders of the currency have the right to convert it freely at the going exchange rate into any other currency. A currency is deemed to be fully convertible if it fulfills the following three criteria: it can be used for all purposes without restrictions; it can be exchanged for another currency without limitations; it can be exchanged at a given exchange rate. A fully convertible currency is the monetary unit of a country where holders of the currency have the right to convert it freely at the going exchange rate into any other currency. A currency is said to be fully convertible if it fulfills one or more of the following three criteria about usability, exchangeability and market value: it can be used for all purposes without restrictions; it can be exchanged for another currency without limitations; It can be exchanged at a given exchange rate.

The functional currency is the currency of the primary economic environment in which a company operates. It is the currency in which a company primarily generates and expends its cash. In most cases, the functional currency is also the firm’s ‘accounting currency’ or ‘reporting currency’, i.e. the monetary unit used by a firm to record its transactions and to present its financial statements. A company can decide to present its financial statements in a currency different from its functional currency, for example when preparing a consolidated report for its parent in a foreign country. While a company can choose its accounting currency, it cannot change its functional currency.