Glosario

A pegged exchange rate, also known as a fixed exchange rate, is a currency regime in which the country’s currency is tied to another currency, usually USD or EUR. The purpose of a pegged exchange rate is to stabilise the value of the local currency, keeping it at a fixed rate in order to avoid exchange rate fluctuations. A country may decide to stabilise its exchange rate through a pegged exchange rate to prevent an excess of under- or over-valuation. Such arrangements can work well for some time, especially if the country that applies it is seen as credible by foreign exchange markets participants. Sooner or later, however, differences between the currencies concerned —due to inflation rates, productivity levels or other factors— are bound to create uncertainty about the peg, which (paradoxically) could lead to even more exchange rate instability over the medium- to long term.

Plain vanilla is a term used to describe a financial instrument with no unusual features. The simplest forward, options and swap contracts are all examples of plain vanilla financial instruments. Thanks to their simplicity, they are generally cheaper than non-plain vanilla products. Plain vanilla forward contracts, such as Outright Forwards and Open Forwards are the most widely used instrument in Currency Management Automation solutions. This is because, unlike complex financial instruments designed for special situations, plain vanilla currency forwards answer most of the day-to-day FX risk management needs of companies.

Pre-transaction risk comprises the firm’s operational and currency risk before a transaction is committed. From the operational point of view, pre-transaction risk starts with the process of collecting and monitoring the firm’s FX exposure. Is the process of collection exposure timely, relevant and accurate? Are currency markets monitored with manual or automated processes? In terms of currency risk, pre-transaction risk, also known as pricing risk, refers to possible exchange rate fluctuations between the moment a company prices a transaction and the moment it is formally agreed. It is especially prevalent in industries that operate with framework contracts like the specialty chemicals industry. Pricing risk, in this case, starts when FX-denominated inventory is purchased and continues until the corresponding sales transaction is agreed.

The presentation currency is the monetary unit used by a firm to record its transactions and to present its financial statements. The presentation currency is also known as the reporting currency or accounting currency. In most cases, the presentation currency is also the firm’s ‘functional currency’, i.e. the currency in which it primarily generates and expends its cash. 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 presentation currency, it cannot change its functional currency.

Product bundling is a marketing practice that involves selling a range of different goods or services as a unique end product.There are different types of product bundling.Closed bundle: the customer has no option but to purchase all the products in one set.Open bundle: the customer has to purchase a minimum quantity of products and can add optional products to the bundle, to obtain additional advantages.Dynamic bundle: the customer can create the bundle or set of products or services they need to receive advantageous conditions.Product bundling is a system that has been used in diverse areas and is common in imperfectly competitive markets, such as telecommunications, software industries or in the insurance and banking sectors, where oligopolies or monopolistic practices are in play.