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Glosario

Navegue por el complejo mundo de la administración de divisas con nuestro completo diccionario de términos y definiciones financieras.

foreign exchange short position
foreign exchange short position

A foreign exchange short position in FX forward markets is a commitment to sell a specified amount of one currency against payment in another currency at a fixed future date, known as the value date, at a specified exchange rate. Typically, a foreign exchange short position offsets a corresponding ‘long’ position that a company takes when it agrees to sell goods for delivery at a future date. In effect, such a foreign exchange short position enables the company to convert a long underlying position to a zero net exposed position, with the forward contract receipt cancelling out the corresponding account receivable.

foreign exchange swap/fx swap
foreign exchange swap/fx swap

A foreign exchange FX 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, foreign exchange FX 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’.

forex trading platforms
forex trading platforms

A forex trading platform is a portal or software interface that allows customers to trade currencies with execution in all major FX instruments, including spot, forwards, NDFs, limit orders, options and swaps. Forex trading platforms provide liquidity through a single dealer (single dealer platform) or multiple dealers (multi-dealer platforms). Forex trading platforms advertise their capacity in terms of displaying transparent pricing, complying with best price execution requirements and providing trade history. Leading forex trading platforms targeting corporate clients offer seamless integration to Treasury Management Systems (TMS) with Straight-Through Processing (STP). Currency Management Automation solutions integrate forex trading platforms, providing connectivity between the ERP/TMS and forex trading platforms in order to automate FX hedging and distribute risks among multiple banks.

forward contract opportunity profit
forward contract opportunity profit

A forward contract opportunity profit exists when the value of a long (short) forward position increases (decreases) prior to contract expiration, reflecting a shift in the underlying spot exchange rate. A speculator might take the opportunity profit and close out the position. However, closing out a forward position taken as a hedge would leave the underlying exposure unprotected. When forward points are not favourable and the firm tolerates some degree of deviation between the budget rate and the spot rate at the time of setting the budget, the budget can be hedged with conditional orders—’take-profit’ if currency markets move in the firm’s favour, and ‘stop-loss’ if markets move against. This program allows the firm to protect a ‘worst-case scenario’ budget rate while delaying hedging as much as possible and still allowing it to profit from possible favourable market moves.

forward element
forward element

The forward element is a concept introduced by the IFRS 9 standards for general hedge accounting and defines the forward points of a forward contract, to distinguish it from the spot element of the contract. Forward points are the basis points added to or deducted from the current spot rate to determine the forward rate at which the forward contract will be settled on the delivery date. These forward points result from the difference between the interest rates of the two currencies and the duration of the contract. One of the changes under IFRS 9 is the possibility of excluding it from the designation of a forward contract as the hedging instrument and accounting for it as costs of hedging.Under IFRS 9, companies can store the forward element in other comprehensive income (OCI). Changes in the fair value of the forward points, thus, will not affect the profit and loss, thereby increasing the effectiveness of the hedging relationship and mitigating income statement volatility.

functional currency
functional currency

The functional currency is the currency of the primary economic environment in which a company operates. It is the currency in which a company primarily generates and expends its cash. In most cases, the functional currency is also the firm’s ‘accounting currency’ or ‘reporting currency’, i.e. the monetary unit used by a firm to record its transactions and to present its financial statements. A company can decide to present its financial statements in a currency different from its functional currency, for example when preparing a consolidated report for its parent in a foreign country. While a company can choose its accounting currency, it cannot change its functional currency.

fx broker
fx broker

A foreign exchange broker is an intermediary who matches the buy and sell orders from its clients to other clients buy and sell orders. They organise trades on behalf of their clients, the traders. This is the main difference with forex dealers, who trade with and against their clients. There are several benefits that an FX broker can bring to its clients. A broker will guarantee that there is trust and creditworthiness between the two trading parties. This means that trades will actually be settled and also there is no need for traders to check every other trader’s creditworthiness to make the exchange. This would be impossible without the broker. A second benefit is that the broker has access to liquidity providers and market makers. These relationships with banks, financial institutions and dealers mean that the broker will get preferential exchange rates that they then pass on to their clients.

fx global code of conduct
fx global code of conduct

The FX Global Code of Conduct is a set of global principles of good practice in the foreign exchange market, developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market. It is intended to promote a robust, fair, liquid, open, and appropriately transparent market. The FX Global Code of Conduct was put together as a joint effort by central banks (the so-called Foreign Exchange Working Group or FXWG) and the private sector side (the so-called Market Participants Group or MPG. The FX Global Code of Conduct does not impose legal or regulatory obligations on market participants, nor does it substitute for regulation. Signatories, however, are expected to abide by its informal set of recommendations in the following areas: ethics, governance, execution, information sharing, risk management and compliance and confirmation and settlement process.

fx market participants
fx market participants

FX market participants are the main players in the world of global foreign exchange. They can be classified into three broad categories: liquidity providers, end-users and governments. Helped by brokers and dealers with whom they have close relationships, international banks are the key liquidity providers. They facilitate end-users’ access to liquidity. The most important end-users are corporations, hedgers and speculators. Corporations use FX markets to settle foreign-currency denominated transactions and to hedge the corresponding currency risk, mainly with forward contracts. Speculators include FX- and macro-oriented hedge funds, asset managers and retail investors. Governments are active in FX markets mainly with the activities of central banks. Central banks are the issuers of individual currencies; they can affect currency rates by intervening directly in FX markets or —as happens much more frequently— by altering liquidity conditions through monetary policy tools to act on short-term interest rates.

fx policy guidelines
fx policy guidelines

FX policy guidelines are a set of procedures that spell out a firm’s methodology and tools in terms of managing currency risk. Drawn by the finance team, FX policy guidelines are based on the business specifics of each company, including its pricing parameters, the location of its competitors, the weight of FX in the business, and the situation in terms of forward points. FX policy guidelines should be clearly communicated across the enterprise, in as much detail as possible. This is especially true in the case of firms with high ‘FX sensitivity’, i.e. firms with low profit margins and/or a high weight of foreign currencies in their business. In such firms, FX-related matters are of strategic importance. Therefore, FX policy guidelines should be clearly communicated and explained by the finance team to all relevant stakeholders within the enterprise. They should be well understood and assimilated by top-level managers, including the CEO and the Board.

fx policy mandate
fx policy mandate

A company’s FX policy mandate is the document that sets out: (a) management’s strategic objectives in terms of currency management; (b) the goals of the firm’s FX hedging program. Given the FX policy mandate, the finance team spells out the practical steps needed to execute the firm’s hedging program. For example, a firm in the industrial machinery space that expands into emerging markets can include, in its FX policy mandate, the instruction to price in local currencies, and the goal of hedging the corresponding FX risk in a way that creates savings in terms of the cost of carry.

fx policy template
fx policy template

An FX Policy Template is a document that sets out a firm’s strategic objectives in terms of currency management, as well as the goals of its hedging program or combination of programs. The FX Policy Template also enumerates the resources allocated to the finance team in order to execute FX hedging. In firms that automate part or most of their FX hedging, the FX Policy Template should provide a detailed ‘FX Workflow’ framework, a step-by-step description of the procedures involved in the pre-trade, trade and post-trade phases of the FX hedging execution.

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