Glosario

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.

Un “Target Redemption Forward” o una “Target redemption Note” son productos financieros estructurados que engloban una serie de contratos a plazo. Estos productos ofrecen al comprador un tipo de cambio a plazo más conveniente que con el seguro de cambio estándar, a condición de que el precio spot se encuentre por encima de un determinado nivel (el strike price o precio de ejercicio) en el momento del vencimiento.

Si el tipo de cambio supera el precio de ejercicio en el momento del vencimiento, el comprador obtiene un beneficio. Por el contrario, si el tipo de cambio al contado no ha superado ese precio de ejercicio, el comprador puede ser obligado a cambiar las divisas a un tipo de cambio más desfavorable durante la duración del contrato

Un TARF no es el mejor instrumento para una empresa que tiene como objetivo cubrir el riesgo de tipo de cambio. Estos productos están destinados, más bien para inversores especulativos. A pesar de ofrecer un tipo de cambio más atractivo, presentan importantes inconvenientes:

-       No garantizan un tipo de cambio determinado a vencimiento.

-       En muchos casos tienen apalancamiento, lo que puede aumentar las pérdidas si el tipo de cambio se mueve en contra del comprador.

-       No garantizan poder cambiar el valor nominal del contrato a vencimiento.

Las empresas que buscan una gestión racional del riesgo de divisas tienen alternativas más sencillas como los seguros de cambio.

A trade repository (TR) is defined by the European Securities and Markets Authority (ESMA) as “an entity that centrally collects and maintains records of securities financing transactions”. For the TR, this means validating, storing and matching transaction reports, making those reports available to authorised regulators and aggregating and anonymising the reported data as public information. Trade Repositories play an important role in enhancing the transparency of derivative markets and securities financing markets, and thus of the financial system. For this reason, they are heavily regulated by the government agencies in charge of financial markets supervision.

Trading platforms, also known as electronic trading platforms, are software programs provided by third parties that allow investors and traders to access, monitor and operate in the financial markets in exchange for a fixed fee, at a discount rate or, in some cases, for free.The Internet and financial technology developments have provided investors with the possibility of trading by themselves using a wide choice of online platforms. Some even provide services including information, research and recommendations of specific stocks or mutual funds (groups of stocks) for investment.Rather than trading through a broker or an investment bank, platforms such as Nutmeg are becoming more and more common among market participants. The Foreign exchange market has experienced spectacular growth in recent years as the advent of online forex trading platforms has boosted the volume of retail operations.

Transaction Cost Analysis (TCA) is the study of trade prices to determine whether past trades were arranged at favourable prices—low prices for purchases and high prices for sales. At the heart of TCA is the difference between the cost of the transaction at the time the manager decided to execute it and the actual cost, including all operating charges—spreads, commissions and fees. The resulting differential is called “slippage”. Currency Management Automation solutions aim at both minimising trading costs —by providing connectivity to best-price execution platforms— and providing the necessary data to conduct Transaction Cost Analysis.

Transaction exposure is the degree to which future FX-denominated cash flows from contractually binding transactions are affected by currency fluctuations. Transaction exposure exists whether or not the corresponding receivables/payables have been created. Some elements of transaction exposure are included in the firm’s accounting exposure This is the case of AR/AP receivables/payables) that have been created and appear on the balance sheet. Other elements of transaction exposure, such as contractually binding SO/PO (sales/purchase orders) not appearing on the balance sheet, are part of the firm’s operating exposure). Transaction exposure, because of its significance in terms of profit margins and cash flows, is the most widely hedged FX exposure.

Transaction exposure management is the hedging of future FX-denominated cash flows that result from contractually binding transactions, whether or not the corresponding receivables/payables have been created. In transaction exposure management, currency forwards are booked for SO/POs (sales orders/purchase orders) and/or AR/AP (accounts receivable/accounts payable). Transaction exposure management requires constant vigilance, as new orders keep on arriving. It is best implemented with Currency Management Automation solutions that allow firms to monitor and hedge their FX transaction exposure in any currency pair, whatever the number of transactions and their size.