Glosario

The dollar offset method is one of the accounting procedures recognised by the International Accounting Standards Board (IASB) to test the effectiveness of a hedging relationship. At each reporting period, the fair value of the forecast transaction (hedged item) and the fair value of the hedging instrument are measured. The resulting differences are recognised in profit or loss (for the ineffective part of the hedge) or in other comprehensive income as a cash flow hedge reserve (for the effective part of the hedge).

In FX forward markets, a drawdown refers to the act of performing an early draw, i.e. exchanging a portion of the total amount specified in a flexible FX forward contract before the expiration of the contract.The period in which the contract holder can activate such drawdowns, for example three months, is established in the contract terms. Flexible forward contracts are an effective method of hedging against currency risk, and allow the contract holder to make regular payments using the same exchange rate for a specific time period. They can therefore be useful for companies that make regular payments to an overseas supplier

Dynamic Hedging, o cobertura dinámica del riesgo de divisa es un modelo de gestión flexible del riesgo de tipo de cambio que permite a las empresas e inversores readaptar su estrategia y sus posiciones de cobertura a las evoluciones del mercado.

Diferencias con estrategias de cobertura tradicionales

Esta estrategia dinámica difiere de los modelos tradicionales de gestión de divisas en la flexibilidad que ofrece para modificar las operaciones de cobertura sobre la marcha y adaptar el tipo de cambio de cobertura a niveles más cercanos al tipo de cambio real.

Por ejemplo, las empresas exportadoras, que venden productos y servicios en divisas tienen una exposición más o menos continuada a las variaciones del tipo de cambio de esas divisas.

Si quieren garantizar sus márgenes, estas empresas tienen dos opciones:

• Pre-Hedging: La empresa fija su política de precios en relación con un tipo de cambio objetivo y ejecuta coberturas con antelación por el volumen estimado de ventas de un periodo específico que puede ser hasta de un año. Esta estrategia garantiza unos márgenes estables para toda la temporada, pero impide readaptar los precios, lo que puede llevar a perder competitividad en algunos casos.
• Dynamic Hedging: La empresa fija sus precios según el tipo de cambio del día y cubre los ingresos provenientes de sus ventas en divisas al final del día o cuando el volumen de exposición alcanza un cierto nivel. Esta estrategia permite a la empresa cubrir su exposición al tipo de cambio actual (minimizando las diferencias con el tipo de cambio objetivo). Una vez la exposición ha sido reducida a cero, la compañía puede decidir mantener sus precios si el tipo de cambio se ha mantenido estable o cambiarlo para preservar sus márgenes de beneficio si el tipo ha variado.

Las empresas que trabajan con precios fijos o con catálogos de temporada están obligados a hacer pre-hedging si no quieren poner sus márgenes en peligro. Sin embargo, para empresas digitales como las agencias de turismo online, marketplaces u otras empresas con plataformas de comercio electrónico que pueden modificar sus precios regularmente son más interesantes las soluciones como Dynamic Hedging, que les permite aprovecharse de los movimientos favorables del tipo de cambio y protegerse de los adversos.

An early draw involves exchanging a portion of the total amount specified in a flexible FX forward contract before the expiration of the contract.The period in which the contract holder can activate early draws, for example three months, is established in the contract terms. Flexible forward contracts are an effective method of hedging against currency risk, and allow the contract holder to make regular payments using the same exchange rate for a specific time period. They can therefore be useful for companies that make regular payments to an overseas supplier.

ECB exchange rates are a set of daily foreign exchange rates, published by the European Central Bank (ECB), that are used as reference by companies and other participants in FX markets. The reference rates are usually updated around 16:00 CET on every working day on the ECB website. ECB exchange rates are based on a regular daily concertation procedure between central banks across Europe, which normally takes place at 14:15 CET. All currencies are quoted against the euro, the base currency. ECB exchange rates are published for information purposes only. They are often used for the annual financial statements of corporations, tax returns, statistical reports and economic analyses.

The economic calendar is a schedule of the most relevant economic events followed by investors. These events often have a significant impact on the financial markets and currency volatility.Foreign exchange markets are most affected by monetary and fiscal policy announcements, as well as by financial reports. A currency calendar allows investors to know what is going to happen when.Some of the most important events for the currency market include the US non-farm payroll reports, inflation figures and changes in interest rates. Investors also scrutinise central bank meetings and statements for even slight indicators of impending monetary policy.

Economic exposure to foreign exchange risk is the extent to which the present value of a firm’s expected future cash flows is affected by exchange rate changes. Economic exposure comprises two cash flow exposures: transaction exposure and operating exposure. Transaction exposure reflects future FX-denominated cash flows that result from already existing, contractually binding, sales or purchase orders (SO/PO), whether or not the corresponding receivables/payables have been created. Operating exposure measures the extent to which currency fluctuations alter the firm’s future operating cash flows, that is, its future revenues and costs. Operating exposure may arise even in a firm with cash flows denominated solely in its home currency, if its costs and/or price competitiveness are affected by FX fluctuations.

Economic exposure management is the set of hedging programs, pricing strategies and other measures taken by companies to protect themselves from the effects of adverse currency fluctuations. Economic exposure comprises two cash flow exposures: transaction exposure and operating exposure. Transaction exposure can be managed by implementing the adequate hedging program or combination of hedging programs. The details of each program vary according to the pricing dynamics, the weight of FX in the business, the location of competitors, and the situation in terms of forward points. Operating exposure can be managed by adjusting the firm’s market selection, pricing policy and product mix. With the appropriate hedging programs, many firms have the opportunity to ‘embrace currencies’ —buying and selling in the currency of their suppliers and clients—, thus expanding market share while protecting profit margins.

Economic Value Added (EVA) is an economic performance metric that results from comparing a firm’s return on capital ROC with its cost of capital r. In its simplest version, the formula is: EVA = (ROC - r) x Total capital When a firm’s return on capital exceeds its cost, the performance is satisfactory from investors’s point of view. Currency management can affect EVA in a variety of ways. ROC can be enhanced by buying and selling in foreign currencies, while a solid risk management process could lead —everything else remaining equal— and to a lower r. Both impacts would create more Economic Value Added.

Hedging relationship effectiveness is a concept introduced by the hedge accounting standards, referring to the extent to which changes in the fair value of a hedged item are offset by opposite changes in the fair value of the financial derivative instrument intended to hedge it. An effective hedging relationship is one of the main requirements of the different standards for hedge accounting. Under hedge accounting, an effective hedging relationships need to meet three conditions: Economic relationship. There must be an inverse relationship between the change in the value of the hedged item and the change in the value of the hedging instrument. Credit risk. Changes in the credit risk of the hedging instrument or hedged item should not be large enough as to dominate the value changes associated with the economic relationship. Hedge ratio. The appropriate hedge ratio should be maintained throughout the life of the hedge.

Enterprise currency management is a software category that comprises a wide range of solutions designed to automate different aspects of a firm’s currency management. Included in this automation process is the ‘FX Workflow’ framework, i.e. the procedures involved in the pre-trade, trade and post-trade phases of FX hedging. The vast majority of Enterprise currency management solutions are provided by the Fintech industry. The common denominator of all these solutions is that they leverage technology to make currency management simpler and more efficient.