Glossary

As a result of the sharp reduction in bank lending to companies after the Global Financial Crisis, equity crowdfunding has been the solution for many budding start-ups, providing much needed capital in exchange for equity. Equitynet and FundedByMe are but two examples.

An exchange rate is the price of one country’s currency in terms of another currency, often known as the reference currency. For example, EUR-USD = 1.25 expresses the number of U.S. dollars that one euro will buy. In this example, EUR is the base currency. The same exchange rate, however, can be expressed as USD-EUR = 0.80, showing the number of euros that one dollar will buy. In this case, USD is the base currency. Exchange rates can be for spot or forward delivery. A spot rate is the price at which a currency is traded for delivery in 48 hours, while the forward rate is the price at which FX is quoted for delivery at a specified future date. Exchange rates are determined by the interplay of demand and supply forces in the foreign exchange market, an electronically linked network of banks and FX dealers whose function is to bring together buyers and sellers of foreign exchange.

Exchange rate forecasts are quarterly estimations of the future levels of exchange rates over the next four quarters. They are undertaken by economists and currency analysts working for portfolio management firms and investment banks. Exchange rate forecasts are for the most part based on expectations regarding macroeconomic variables, interest rate differentials, sentiment, and even political events. Once these individual forecasts are out, their average —for each currency pair— is presented in a variety of surveys. Some companies incorporate such average forecast exchange rates as ‘budget rates’ for a period. However, given the unpredictable nature of currency moves, the reliability of exchange rate forecasts remains an open question.

Exchange rate risk or foreign currency risk is the possibility that currency fluctuations can affect a firm’s expected future operating cash flows, i.e., its future revenues and costs. For companies desiring to take advantage of the growth opportunities derived from buying and selling in multiple currencies, effectively managing currency risk is an essential task. Exchange rate risk can be decomposed into: Pricing risk Accounting risk Transaction risk Operating risk Pricing risk refers to possible exchange rate fluctuations between the moment a company prices a transaction and the moment it is formally agreed. Accounting risk reflects changes in income statement and balance sheet items caused by currency fluctuations. Transaction risk refers to future FX-denominated cash flows that result from existing, contractually binding firm commitments (sales or purchase orders), whether or not the corresponding receivables/payables have been created. Operating risk measures the extent to which currency fluctuations alter the firm’s future operating cash flows, that is, its future revenues and costs. Finally, economic exposure comprises the two cash flow exposures: transaction exposure and operating exposure.

Exotic options are variations of simple call and put options. Traded in Over-the-Counter (OTC) markets, exotic options allow traders to manage risks in ways that ordinary options cannot achieve. A call option to buy a put option, also known as a Caput option, is a simple example of an exotic option. Other examples include chooser options, allowing a trader to decide whether the contract is a call or a put at some point over the contract’s life. Also, Asian options have no set strike price and are calculated as the average of some price listed in the contract and the market value of the underlying assets. Due to their complex nature, exotic options are not the most suitable products for corporate treasurers wishing to protect their profits from FX risk.

Under Hedge Accounting, a fair value hedge is a hedge of the exposure to changes in the fair value of a recognized asset or liability or unrecognized firm commitment, attributable to a particular risk and could affect profit or loss. (The other main type of hedge is the Cash Flow hedge).

Fedwire is the abbreviation for the United State’s Federal Reserve Wire Network, a real-time gross settlement funds transfer system that settles funds electronically between any of the United States banks registered in the Federal Reserve System. Each transaction is processed individually and settled upon receipt via a highly secure electronic network. Settlement of funds is immediate, final and irrevocable.

The Financial Conduct Authority (FCA) is a United Kingdom regulatory body that focuses on the regulation of financial services firms (retail and wholesale). It is funded by membership fees it charges and is completely independent of the United Kingdom government.The FCA has a crucial role in maintaining the integrity of financial markets in the UK and regulating the conduct of firms that supply financial services.The FCA was preceded by the Financial Services Authority (FSA), which was abolished following the enactment of the Financial Services Act 2012. The Financial Services Act 2012 introduced a regulatory framework involving the FCA, the Bank of England Financial Policy Committee and the Prudential Regulation Authority.Under the FCA's remit, its powers include:- The power to investigate organisations or individuals;- The power to ban financial products or services for up to a year while considering a permanent ban;- A supervisory role with banks and authorised payments institutions to ensure customer treatment is fair, to oversee healthy competition and to spot financial risks early in order to mitigate the chance of systemic damage.In an attempt to encourage innovation in the financial sector, in 2014 the FCA launched FCA Innovate, an initiative aiming to support the development of innovative products and services that improve customers' access to finance. This initiative was crucial for the development of UK Fintech companies.

Financial statement translation is the process through which a firm restates, —in the currency in which a company presents its financial statements—, all assets, liabilities, revenues, expenses, gains and losses that are denominated in foreign currencies. This process of financial statement translation results in accounting FX gains and losses. There are three main financial statement translation methods available. With the current/noncurrent method, all the foreign exchange denominated current assets and liabilities are translated at the current exchange rate, while non-current assets and liabilities are translated at the historical exchange rate. With the monetary/nonmonetary method, monetary items such as cash, accounts receivable and payable, are translated at the current exchange rate, while nonmonetary items (inventory, fixed assets) are translated at the historical exchange rate. Finally, with the current rate method, all balance sheet and income statement items are translated at the current exchange rate. No matter what financial statement method is used, the resulting FX gains and losses are paper only, and rarely affect cash flows.

The term Fintech, made up of ‘finance’ and ‘technology’, describes innovative companies in the financial services industry that rely on software-based solutions to deliver their products. Fintech firms are active in a wide array of B2C and B2B markets: payments, insurance, loans, cryptocurrencies, asset management, equity, FX and commodities. Risk management is an area of increasing importance. Fintech players are creating an entirely new field as they deploy cloud-based applications to help companies manage financial risk. One example is Currency Automation Management. Fintechs in this space provide businesses with end-to-end FX automated hedging programs that can be tailored to the specific needs of each company in terms of pricing dynamics, degree of forecast accuracy and forward points situation.

Fintech companies provide financial services using technological innovation. The rise of Fintech was made possible by the convergence of technological development and changes in financial regulation.Fintech companies essentially offer alternatives to traditional banking in services such as equity funding, lending, payments and foreign currency trading. What sets these new companies apart is their use of technologically sophisticated methods and an approach focused on the client, rather than on short-term profit.With that philosophy, the Fintech industry is challenging the traditional finance sector, which has long been dominated by banks, followed by brokers, wealth management firms, asset portfolio management firms and financial advisors.