Glosario

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

A currency swing is a large fluctuation in exchange rates, usually due to an unexpected market event. Sharp currency swings take place every now and then in currency markets. They are a normal feature of the flexible exchange rate system. They illustrate the need for adequate FX hedging programs to protect companies’ profit margins from sudden and unexpected FX moves. The implementation and management of these FX hedging programs may be quite burdensome for treasury teams that rely on manual execution and spreadsheets. However, Currency Management Automation solutions allows firms to run them smoothly, on a fully automated basis.

Currency volatility is the frequency and extent of changes in a currency’s value. It is measured by calculating the dispersion of exchange rate changes around the mean, expressed in terms of daily, weekly, monthly or annual standard deviations. The larger the number, the greater the volatility over a period of time. Episodes of currency volatility are a normal occurrence in a world of flexible exchange rates. During such episodes, companies with inadequate hedging programs in place are likely to feel the impact of proportional volatility in terms of their performance.

The current rate method is used in translation exposure management to restate —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. With the current rate method, all balance sheet and income statement items are translated at the current exchange rate. For this reason, the current rate method is the simplest. The other main methods are the current/noncurrent method and the monetary/nonmonetary method. It should be noted that, no matter what translation account exposure management method is used, the resulting FX gains and losses are paper only, and rarely affect cash flows.