Glossary

In corporate finance, liquidity risk is the risk that a firm may not be in a position to lay its hands on the cash needed to meet its short-term obligations. To assess liquidity risk, investors look at several financial ratios, including the current ratio, the quick ratio and the cash ratio.

Live exchange rates are real time spot and forward currency quotes provided by liquidity providers such as banks, FX brokers and dealers, and multi-dealer trading platforms. Live exchange rates allow managers to monitor their FX exposure and to execute hedges when required. By connecting to providers of live exchange rates, Currency Management Automation solutions allow managers to monitor their exposure in real time, 24/5, in any currency pair, and for any number of transactions.

For a company that operates internationally, local currency payments are transactions that are priced, invoiced and settled in the local currency of a client (sales transactions, or exports) or supplier (purchase transactions, or imports), rather than in the firm’s own functional currency. On the contracting side, buying capacity in the local currency immediately results in a wider range of inventory choices. Crucially, it allows firms to avoid costly markups charged by suppliers who seek to protect themselves from FX risk when forced to sell in a foreign currency. On the selling side, firms that sell in the local currency avoid passing on FX markups to their clients, gaining competitiveness and expanding sales. Finally, in terms of pricing, there are several ways in which the FX-savvy travel firm can take advantage of forward points, the difference between forward and spot currency rates. Operating in the currency of clients/suppliers presupposes effective FX hedging. Depending on a company’s specific parameters, Currency Automation Management solutions allow managers to design the hedging programs that best protect them for currency risk, in an automated manner.

A long currency hedge refers to a strategy aiming to minimise the risk related to cash flows due for settlement at a future date, for instance in one year’s time. The hedger secures the current exchange rate for that payment to protect themselves from potential losses due to exchange rate fluctuations.For example, a French company (which uses the euro as its functional currency) places a large order with its US supplier (who accept payments in US dollars) worth $10 million, to be paid for in a year’s time. By using a long currency hedge to set the exchange rate at the current rate, the company reduces its exposure to the fluctuation of the EUR/USD exchange rate.For instance, if the one-year forward rate is EUR/USD 1.20 and the spot rate in one year’s time is EUR/USD 1.15, the company will have benefited by locking in the exchange rate in advance, saving the equivalent of $500,000 that would otherwise be lost to the FX market. However, if the dollar appreciates against the euro, the company will have made a loss against the exchange rate available when they have to pay for their order.If this loss is sizeable, it could be highly detrimental to the company. To diversify risk, the company could choose to only take a long currency position for a specific percentage of its exposure and mix its hedging methods.

Major currency pairs are the most widely traded currency pairs: EUR-USD, USD-JPY, GBP-USD and USD-CHF. According to data from the Bank for International Settlements (BIS), the U.S. dollar is the most widely traded currency, being on one side of 88% of all trades in the $6.1 trillion/day FX market. Other major currency pairs include EUR-CHF, USD-CAD, AUD-USD. Major currency pairs are traded 24/5 all over the world in highly liquid markets, with low bid-offer spreads both in spot and forward markets.

Managed Floating Exchange Rate: Definition & How It Works

A managed floating exchange rate — also known as a "dirty float" — is a currency regime in which a central bank actively intervenes in foreign exchange markets to keep its currency within a target range, without committing to a fully fixed peg.

Unlike a pure floating regime, where market forces alone determine a currency's value, and unlike a hard peg, where a rate is locked to another currency by policy mandate, managed floats occupy the middle ground. The central bank monitors the exchange rate continuously and steps in — typically by buying or selling its own currency in the open market — whenever the rate drifts beyond an acceptable corridor. The goal is not to eliminate exchange rate movement, but to prevent extreme swings that could destabilise the economy, harm exporters, or fuel inflation.

How it works in practice

The most prominent modern example is China's renminbi (CNY) regime. Each morning, the People's Bank of China publishes a reference rate — a midpoint — against which the renminbi is permitted to move no more than 2% in either direction during onshore trading that day. This creates a daily band: narrow enough to give the central bank meaningful control, wide enough to allow some market-driven movement.

Other central banks — particularly in emerging market economies — use similar mechanisms, intervening less systematically but still with clear intent to smooth volatility or defend competitive exchange rate levels.

Why it matters for corporate treasurers

For companies with international operations, the regime governing a trading partner's currency has a direct bearing on FX risk management. A managed float introduces a specific kind of complexity: the currency behaves as though it floats, and standard hedging tools can be applied, but central bank intervention can cause abrupt, policy-driven moves that do not follow typical market logic.

This is particularly relevant for businesses exposed to currencies such as CNY, INR, or BRL — currencies that operate under varying degrees of managed float arrangements. In these cases, a treasurer cannot rely solely on market signals when forecasting exchange rate movements. Policy decisions, reserve levels, and the central bank's credibility all feed into the picture.

Understanding the exchange rate regime of each currency in your portfolio is therefore a foundational step before building any FX hedging programme. It informs which instruments are available and liquid, how far in advance exposure can realistically be hedged, and how to interpret rate movements when calibrating your budget rate.

A managed float is neither inherently more nor less risky than a free float — what matters is that your currency risk management approach accounts for the specific dynamics of each regime your business operates in.

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Margin is the security required from the borrower in all kinds of financial transactions. It protects lenders against the risk of a payment default. If a borrower fails to pay the amount owed on the due date, the lender can claim the collateral in order to minimise losses from the defaulted payment. Margin is a crucial element in loans and other financial instruments like forward or futures contracts, as it lowers the risk of default and limits the negative impact of any default to a transaction as well as, more generally speaking, to international trade and the financial markets.

A margin call is a demand to deposit additional funds or securities to cover possible losses. A margin call usually indicates that the collateral held for a given position has lost value. Let us imagine a situation where a ‘short’ EUR forward position is initiated, on which a 5% margin is requested. The position is ‘long’ USD 100,000 and the forward rate is EUR-USD 1.1111. Measured in EUR, the initial margin requirement is EUR 4,500 = 100,000 x 0.9000 x 0.05. If the forward rate moves to 1.1240, the forward position loses EUR 1,032.03. A margin call may be triggered if the ‘cover’ (the loss in proportion to collateral in deposit) falls below, say, 80%. This would be the situation in our example, as the ‘cover’ would be 77.07% = (4500 - 1,032.03)/4,500. An unheeded margin call on such a position may result in the automatic closing of the position at the prevailing market rate. That would happen if the ‘cover’ falls below, say, 60%.

A margin deposit refers to the funds held in security that is required as a protection against possible losses. Let us imagine a situation where a ‘short’ EUR forward position is initiated, on which a 5% margin is requested. The position is ‘long’ USD 100,000 and the forward rate is EUR-USD 1.1111. Measured in EUR, the initial margin requirement is EUR 4,500 = 100,000 x 0.9000 x 0.05. If the position shows losses, the margin deposit may need to be increased, depending on the severity of the loss.

Margin requirement is a financial concept related to the minimum amount in collateral that the issuer of a financial security requests from the buyer, to hedge against the risk of adverse price movements or the buyer defaulting.In the foreign exchange markets, businesses or individuals who wish to enter a currency forward contract in order to protect their exposure to exchange rate volatility are normally requested to deposit a minimum margin requirement.It acts as a surety against transactional default and provides other parties to a transaction with confidence that the counterparty will fulfil its contractual obligations.The margin requirement in currency exchange is normally in cash, deposited in a margin account. It is usually a percentage of the total amount to be transacted.Should the margin requirement change – as is regularly the case in currency transactions as exchange rates change continuously – there is a margin call, whereby the counterparty must deposit the shortfall in order to meet the new margin requirement.

Margin risk, in the context of FX risk management, refers to the impact of unexpected currency fluctuations on operating profit margins. A Europe-based exporter to the United States could see operating profit margins decrease in the event of a sharp EUR appreciation, as it would be forced to slash USD selling prices in order to maintain market share. A hard definition of margin risk management would be a stated policy of not having operating margin decrease by more than 5%, for example, due to the changes in exchange rates. Currency management, including pricing in foreign currencies and effective hedging programs, can go a long way in protecting a firm from FX-induced margin risk.