Glossary

Accounts payable are liabilities arising from the purchase of merchandise, supplies, and services on credit. Accounts payable require the company to make payment in the future. They are typically registered on the balance sheet when the firm receives an invoice. Accounts payable generally do not call for interest payments.Together with accounts receivable, accounts payable are the key input when a firm hedges balance sheet items in Micro Hedging Programs.

The UK Financial Conduct Authority (FCA) defines an authorised payment institution as a person authorised as a payment institution under the Payment Services Regulations and included in the Financial Services register to that effect.The Financial Conduct Authority is the regulator of the more than 50,000 firms offering financial services in the UK, including cross-border payment providers, to ensure that markets work efficiently for business and individuals and are honest, fair and effective towards consumers.

The base currency is the first currency appearing in a currency pair quotation. The second currency quoted expresses the number of units of that currency that are equal to one unit of the base currency. For example, if the EUR-USD is quoted at 1.25, EUR is the base currency, and USD is the quote currency.It means, in this example, that one EUR is worth 1.25 USD. In most quoting conventions, USD is the base currency for emerging market currencies: USD-BRL, USD-TRY, USD-RBL, etc. In futures markets, which are mostly based in the United States, the base currency is always the foreign currency.

The base currency interest rate is the short-term or money-market interest rate of the currency that, in a currency pair, is quoted first. For example, if the EUR-USD is quoted at 1.25, EUR is the base currency, and the money-market interest rate on EUR is the base currency interest rate. Alongside the money-market interest rate on the quoted currency, the base currency interest rate is used to calculate the forward exchange rate. When calculating the forward rate with the Interest Parity Theorem, the base currency interest rate features in the denominator of that well-known formula.

The bid-ask price is the difference in the price of one currency in terms of the other as shown by banks, brokers and dealers in the foreign exchange market. Banks do not normally charge a commission on their currency transactions, but they profit from the spread between the buying and selling rates on both spot and forward transactions.Quotes are always given in pairs because a dealer usually does not know whether a prospective customer is in the market to buy or to sell a foreign currency. The first rate is the ‘bid’ (or buy) price; the second is the ‘ask’ (or offer) rate. As an example, if GBP-USD is quoted at 1.3018-1.3027, it means that the bank is willing to buy GBP at 1.3018 USD and sell them at 1.3027. A customer of the bank can be expected to sell GBP to the bank at 1.3018 USD and buy them at 1.3027 USD. The dealer will profit from the 0.0009 USD spread between the bid and ask rates.

A blocked currency, also known as a non-convertible currency, is the monetary unit of a country where holders of the currency do not have the right to convert it freely at the going exchange rate into any other currency. A currency is considered to be blocked if it fulfills one or more of the following three criteria about usability, exchangeability and market value:it cannot be used for all purposes without restrictions;it cannot be exchanged for another currency without limitations;It cannot be exchanged at a given exchange rate.

A break forward, also known as cancellable forward, cancellable option or knock-on forward, is an option-like contract used to obtain full participation in a market move in the underlying (for example, a currency) beyond a specified level without payment of an explicit option premium.Break forwards are rarely used when hedging regular foreign currency inflows and outflows. They can be an efficient hedge tool, however, in the event of possible, but contingent, business events.

A specialised form of cash-flow hedging programme specifically designed to protect companies against adverse movements in foreign exchange rates that could impact their predetermined budget rates. These programmes are particularly valuable for businesses that update their pricing only at the end of reference periods, ensuring that currency fluctuations do not erode profitability during individual campaign or budget cycles whilst maintaining pricing competitiveness.

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In FX risk management, a budget period makes reference to the broader financial planning timeframe during which exchange rates, pricing assumptions, financial targets, and overall currency risk management strategies are established and maintained. Budget periods typically align with annual planning cycles and serve as the foundational framework that encompasses multiple shorter campaign periods.

During the budget period, organisations define their budget rates, apply appropriate markups to spot rates, and establish hedging objectives that will govern subsequent campaign periods. The budget period provides the strategic context within which individual campaign periods operate, ensuring consistency in pricing methodology and risk management approach across all operational cycles within the planning horizon.

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The achievement of more favourable exchange rates than the predetermined budget rate, resulting in improved financial performance relative to original planning assumptions. Outperformance can result from skilled timing of hedging transactions, favourable market movements, or sophisticated hedging strategies that capture upside potential whilst maintaining downside protection.

For example, a Europe-based company with purchases in PLN achieved 2.1% outperformance on EUR-PLN through a combination of conditional orders (covering 59.2% of exposure) and micro-hedging of firm orders (covering 40.8% of exposure). Similarly, their GBP-EUR operations achieved 2.8% outperformance with 31.4% hedged through conditional orders and 68.6% through micro-hedging firm sales.

This outperformance occurs because firm orders are only hedged when market rates are more favourable than the budget rate - otherwise, protective stop-loss orders would have been triggered first. Measuring outperformance helps evaluate hedging programme effectiveness and identify improvement opportunities. Flexible and market-based hedging programs allow managers to systematically protect/outperform FX budget rates—whatever the economic scenario.

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The Budget Reference Rate, commonly known as the ‘budget rate’, is the predetermined exchange rate that a company uses for pricing purposes throughout an entire budget or campaign period. This rate is typically established before the campaign commences and serves as the foundation for setting product or service prices.

The budget rate provides stability in pricing decisions by eliminating the uncertainty of fluctuating exchange rates during the operational period, allowing businesses to maintain consistent profit margins regardless of currency market movements. It can be the current spot rate, the current forward rate, an off-market rate, or a market-consensus rate. Even if a firm does not use an explicit benchmark, its budget necessarily contains at least an ‘implicit’ FX rate if foreign currency-denominated transactions are planned.

For firms that set stable prices for the year at the start of their annual budget, the budget coincides with the annual ‘campaign’. In this case, protecting the budget rate (with FX hedging) is the same as protecting the campaign rate

However, in firms that conduct more than one campaign per budget period —for example, a fashion company with several collections or ‘seasons’ per year— an important distinction arises. To the extent that they need to protect a budget rate, this rate should be the budget rate of each individual campaign, rather than the annual budget rate.

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