Glosario

Balance sheet hedging is a hedging program designed to protect FX-denominated assets and liabilities from changes in value due to exchange rate fluctuations. Balance sheet hedging is concerned with a firm’s accounting exposure, as managers desire to eliminate accounting FX gains and losses on their financial statements.Because accounting exposure arises later than economic exposure —which starts from the moment a transaction is priced— balance sheet hedging is not designed to protect a firm’s profit margin from currency risk. It is carried out mostly for the purposes of reporting, as the accounting exposure is clearly visible on financial statements.Currency Management Automation solutions allow companies to combine a balance sheet hedging program with different types of budget hedging programs —static, rolling, layered— and with programs that hedge firm commitments.

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.

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.

The Budget Reference Rate, commonly known as the ‘budget rate’, is the foreing exchange rate used by a company in its budget. 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 rateHowever, 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.

Business foreign exchange refers to the trading of currencies for purposes of real international trade of goods and services, in contrast to the vast majority of FX trades, which are purely speculative.This activity represents less than 2% of the USD5.3 trillion exchanged daily on the global FX market, while speculative trading accounts for the remaining 98%.Companies that operate across borders might carry out business foreign exchange. Exporting to a foreign market, buying or selling assets from abroad and paying employees and consultants are just some of the international transactions that require business foreign exchange.Some companies still manage these FX needs manually using banks or brokers as intermediaries, a rather inefficient process that too often involves hidden charges and spreads.The advent of Fintech has seen new alternatives emerge. Technologically advanced companies are increasingly adopting more efficient FX risk management systems, like Dynamic Hedging, that allow them to automate their FX needs with minimal effort.