Glosario

Cross-border payments are broadly defined as fund transfers for which the sender and the recipient are located in different jurisdictions. As such, cross-border payments cover corporate and retail payments with remittances included in the latter category. Cross-border payments may or may not involve currency conversion. Over the past few decades, the increased international mobility of goods and services, capital and people has contributed to the growing economic importance of cross-border payments. Factors that have supported the growth in cross-border payments include manufacturers expanding their supply chains across borders, global investment flows and international trade and e-commerce. Cross-border payments are by definition more complex than purely domestic ones. They involve more, and in some cases numerous, players, time zones, jurisdictions and regulations. Typically, cross-border payments are perceived to lag domestic ones in terms of cost, speed, access and transparency.

Cross-border risk is the risk that a firm will be unable to obtain payment from its customers on its contractual obligations because of measures taken by the government regarding the convertibility and transferability of funds denominated in a foreign currency. Cross-border risk stems from events associated with a particular country, as opposed to events associated solely with a particular customer.

Cross-border trade in goods and services is defined by the OCDE as the transactions in goods and services between residents and non-residents. It is measured in USD, as a percentage of GDP for net trade (the value of exports minus the value of imports), and also in annual growth for imports and exports. Cross-border trade in services, which exploded in recent decades, records the value of services exchanged between residents and non-residents of an economy, including services provided through foreign affiliates established abroad. Services include transport, travel, communications services, construction services, insurance and financial services, computer and information services, and others . The World Trade Organization (WTO) issues regular forecasts for cross-border trade patterns and growth rates. These forecasts are partly based on the price of copper, a widely recognised leading indicator of economic activity. Arguably, the EUR-USD exchange rate, embedded in so many commercial contracts, is another market-based indicator that is useful in predicting trends in cross-border trade.

A cross-currency 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, cross-currency 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—, cross-currency swaps can be arranged as ‘fixed-for-fixed’, ‘fixed-for-floating’ or ‘floating-for-floating’.

The cross-forward exchange rate is a forward rate between two currencies that do not involve the most traded currencies: USD and EUR. Examples of cross forward rates are the forward rate GBP-JPY, or CAD-BRL. Like any forward exchange rate, cross-forwards reflect the interest rate differentials between the currencies involved.

Cross-hedging is a hedging technique that involves hedging an exposure in one currency with a forward contract denominated in a different, but correlated, currency. Examples of correlated currencies are EUR and CHF, USD and CAD, AUD and NZD, etc.. Cross hedging was very popular with investment portfolio managers when correlated currencies had markedly different interest rates. It is rarely performed in a systematic way by corporate hedgers.

The Cumulative Translation Adjustment (CTA) is an entry in the accumulated other comprehensive income section of a balance sheet (translated into the reporting currency), in which gains and/or losses from FX translation have been accumulated over a period of years. A CTA entry is required under the Financial Accounting Standards Board (FASB) as a means of helping investors differentiate between actual operating gains and losses and those generated via currency translation. They are an integral part of financial statements for companies with international business operations.

Currency appreciation is the increase in the value of one currency relative to another. For example, if the EUR-USD exchange rate moves from 1.00 to 1.15, it means that the euro has appreciated by 15% against the U.S. dollar. Home currency appreciation squeezes the profits of exporters as their sales are less valuable when converted in the home currency. Faced with an appreciating currency, exporters in such situations might attempt to raise selling prices abroad to boost their margins, but they would likely see a fall in export sales. Currency appreciation also means that local firms will face greater competitive pressure in their home markets from foreign companies selling. The more differentiated a company’s products are, the less competition it will face and the greater its ability to maintain its domestic currency prices both at home and abroad in the face of a local currency appreciation. Similarly, if most competitors are based in the home country, then all can raise their foreign currency prices without putting any of them at a competitive disadvantage relative to their domestic competitors.

A currency call option is a financial derivative instrument that gives the holder (buyer) the right —but not the obligation — to buy the contracted currency at a set price or exchange rate (the ‘strike price’), on a predetermined expiration date. The seller of the call option must fulfill the contract if the buyer so desires Because the currency put option has value, the buyer must pay the seller a premium in exchange for the right to exercise the option. An ‘American’ put option can be exercised at any time up to the expiration date; a ‘European’ put option can be exercised only at maturity. When hedging regular foreign currency inflows and outflows, forward contracts are more widely used than currency call options. However, currency call currency options can be an efficient tool when contingent business events are hedged.

Currency codes or country currency codes are three-character combination codes representing each one of the world currencies in circulation. Currency codes are published by the International Organization for Standardization in a list referred to as ISO 4217. Currency codes are composed of a country's two-character Internet country code plus a third character denoting the currency unit. For example, the Canadian Dollar code (CAD) is made up of Canada's Internet code ("CA") plus a currency designator ("D"). In the foreign exchange market, these codes allow traders to eliminate potential confusion caused by names designating more of one currency such as with dollar, peso, pound, or krona.

Currency controls, foreign exchange controls or currency exchange controls refer to restrictions applied by some governments to ban or limit the sale or purchase of foreign currencies by nationals and/or the sale or purchase of local currency by foreigners. Currency controls are mostly used by governments who fear that free convertibility could lead to unwanted currency appreciation or volatility, also known as ‘trade competitiveness and macroprudential’ objectives. Currency controls often pose serious challenges to international companies, either by hindering cash transactions or by making it difficult to use financial instruments such as currency forward contracts to hedge FX risk.

Currency depreciation is the decrease in the value of one currency relative to another. For example, if the EUR-USD exchange rate moves from 1.15 to 1.00, it means that the euro has depreciated by 13% against the U.S. dollar. Holding everything else constant, home currency depreciation can boost the profits of exporters as their sales are more valuable when converted in the home currency. Faced with an depreciating currency, exporters in such situations might afford to slash their prices abroad as their profit margins increase. Currency depreciation also means that local firms will face less competitive pressure in their home markets from foreign companies selling. Sustained currency depreciation, however, is likely to result in rising inflation expectations and interest rates, as shown by many Emerging Markets currencies.