Glosario

Rolling positions forward refers to the extension of an FX forward contract. It is achieved by closing out a soon-to-expire contract and opening another one at the current market price for the same currency pair with a longer-dated maturity. The resulting gains or losses on the expiring forward are charged or refunded by the liquidity provider to the company. For example, a company holds an EUR-USD forward contract covering a USD 1 million payment to a supplier. The contract expires in a few weeks, but the supplier delays delivery for three months, so the company wants to roll the contract over to cover these additional three months. Suppose the initial forward rate was 1.10 and the new forward rate is 1.12. The contract issuer will close the initial contract under which the company needs EUR 909,000 to buy USD 1 million. With the new forward rate of 1.12, the company will have to pay EUR 892,000 on the new maturity date. By rolling over the forward, the liquidity provider should refund the hedger with EUR 17,000.

A SWIFT payment is a cross-border payment processed through the Society for Worldwide Interbank Financial Telecommunication international payment network. This procedure is internationally recognised as the fastest and most secure system for sending financial messages internationally.The SWIFT international payment network sends more than 15 million payments every day and has not lost the documentation of a single transfer in its over 40-year history. Any failure to send funds to their payment destination is due to errors in the details included in the SWIFT payment.The vast majority of the world’s interbank network use SWIFT. Over 10,000 financial institutions worldwide operate in over 200 countries and territories with SWIFT.

The concept of sensitivity analysis in corporate finance refers to a technique used by businesses exposed to currency risk to test the resilience of a company or a business line to a range of variables in different likely scenarios.The main objective of this exercise is to assess the potential impact of variations in elements that are strategic for the business, like exchange rates, interest rates, oil or commodity prices.For instance, a eurozone business that gets 40% of its yearly turnover by selling their products in British pound in the UK market should be interested in assessing the potential impact on their margins of the variations on the EURGBP exchange rate.With that objective, the company could study the volatility ranges of the EURGBP in the last five years and identify the:smallest variation;average variation;largest variation.With those three numbers create three different models to analyse how sensitive is that business line to the different likely scenarios on the euro-pound exchange rate.

A set-and-forget hedging strategy, also known as static hedging, is a budget hedging program where a big hedge is taken at the start of the period and is not reactivated until this period is over. Set-and-forget or static hedging makes sense for businesses with a high degree of forecast accuracy, rarely adjusted and FX-driven pricing, whose customers accept the potential ‘cliff’ created by sharp intra-period currency moves. If forward points are in favour, so much the better.

In a business transaction, the settlement date is the date on which it is due for payment in cash. In the chronology of a typical transaction, the settlement date is the last stage. It is preceded by other stages: forecasting, pricing, contracting (SO/PO, sales order/payment order) and recording (AR/AP, accounts receivable/payable). In a FX forward contract, the settlement date, also known as the ‘value date’, maturity date’ or ‘delivery date’ is the date at which delivery and payment of the agreed-upon amounts take place.

A short currency is the creation of an offsetting short FX position with forward contracts, in order to neutralize any gain or loss on an original ‘long’ currency exposure by a corresponding foreign exchange loss or gain on the hedge. For example, a U.S.-based exporter sells EUR 100,000 of goods worth to a European customer is said to be ‘long’ EUR since EUR will be received from the sale. In order to hedge that position, the firm undertakes a short currency hedge by selling an equivalent amount of EUR in the forward market, with a value date matching the settlement of the business transaction.

The shortcut method is a qualitative method of analysis approved only by the US accounting standards to test the effectiveness of a hedge relationship. In order to adopt hedge accounting, companies may use quantitative methods like the dollar offset method or qualitative methods, the most common of which are the critical terms match (CTM) method. The shortcut method exempts companies from having to prove the future and continuing effectiveness of a hedge if they meet a set of criteria. It is accepted in cases when the hedging relationship involves interest rate swaps and meets a series of very specific criteria. These limitations in effect restrict its use to certain types of simplified hedging relationships involving interest rate risk.

The Single Euro Payments Area (SEPA) is the geographical area where cashless EUR payments across Europe are harmonised. SEPA allows European consumers, businesses and public administrations to make and receive —under the same basic conditions— credit transfers, direct debit payments and card payments. The purpose of SEPA is to make all cross-border payments in EUR as easy as domestic payments. Covering the whole of the EU, SEPA also applies to payments in EUR in other Andorra, Iceland, Norway, Switzerland, Liechtenstein, Monaco, San Marino and Vatican City State.

A soft peg describes the type of exchange rate regime applied to a currency to keep its value stable against a reserve currency or a basket of currencies. Currencies with a soft peg are halfway between those with a fixed or hard pegged exchange rate and those with a floating exchange rate. The main difference between soft and hard pegged currencies is that the soft peg systems provide a limited degree of monetary policy flexibility to allow governments and central banks to deal with economic shocks.Practical examples of soft pegsA soft peg can be applied to the reserve currency within a narrow (e.g. 1%) or a wide (e.g. -25-25%) range and can sometimes be modified over time, usually in relation to variations in international inflation rates.Soft peg currencies include the Chinese yuan, an interesting soft peg currency as it is softly pegged to the U.S. dollar while also being a reserve currency, the Venezuelan bolivar and the Hong Kong dollar (which are both pegged to the U.S. dollar).Any kind of peg can be vulnerable to financial crises - which can result in a significant devaluation or even lead institutions to abandon the peg. Notorious examples of events like these are the Argentinian crisis of 2001 of the Swiss National Bank's decision to abandon the euro peg in 2015.

Stagflation is a term used to describe an economy that is stagnant and experiences little to no economic growth.Signs of stagflation include high rises in the price of consumer goods and services through high inflation, a reduction in gross domestic product and high unemployment.It is exceptionally difficult to move a country out of a stagflated economic state, as the methods used to promote greater economic growth - for instance, to lower inflation - may have a detrimental effect on unemployment figures.Stagflation in JapanJapan's economy has remained largely stagnant since 1990, after a national asset price bubble crisis. The nineties became known as Japan's "lost decade", which has now stretched out over the better part of three decades, as the country has still not been able to return to sustained economic growth.Successive Japanese governments have attempted a plethora of policies in order to try to kick-start the economy, largely to no avail.

A subsidiary is a company, corporation or limited liability company whose controlling interest is owned by another company.The company with a controlling interest (more than 50% of the subsidiary's voting stock) is known as the parent company.The subsidiary, which is recognised as a legal entity in its own right, must comply with the national laws, and any local laws if necessary, of where it is located, regardless of where the parent company is based.One of the dilemmas faced by any company going international and setting up a subsidiary in a country with a different currency to that of the parent company is currency management. The equities, assets and liabilities of the subsidiary are subject to foreign currency risk if they need to be converted into the parent company's functional currency for accounting reasons.Depending on the company’s internationalisation strategy, it may be more advantageous to finance the subsidiary directly from the parent company, or for the subsidiary to bank locally.