Glosario

As a result of the sharp reduction in bank lending to companies after the Global Financial Crisis, equity crowdfunding has been the solution for many budding start-ups, providing much needed capital in exchange for equity. Equitynet and FundedByMe are but two examples.

An exchange rate is the price of one country’s currency in terms of another currency, often known as the reference currency. For example, EUR-USD = 1.25 expresses the number of U.S. dollars that one euro will buy. In this example, EUR is the base currency. The same exchange rate, however, can be expressed as USD-EUR = 0.80, showing the number of euros that one dollar will buy. In this case, USD is the base currency. Exchange rates can be for spot or forward delivery. A spot rate is the price at which a currency is traded for delivery in 48 hours, while the forward rate is the price at which FX is quoted for delivery at a specified future date. Exchange rates are determined by the interplay of demand and supply forces in the foreign exchange market, an electronically linked network of banks and FX dealers whose function is to bring together buyers and sellers of foreign exchange.

Exchange rate forecasts are quarterly estimations of the future levels of exchange rates over the next four quarters. They are undertaken by economists and currency analysts working for portfolio management firms and investment banks. Exchange rate forecasts are for the most part based on expectations regarding macroeconomic variables, interest rate differentials, sentiment, and even political events. Once these individual forecasts are out, their average —for each currency pair— is presented in a variety of surveys. Some companies incorporate such average forecast exchange rates as ‘budget rates’ for a period. However, given the unpredictable nature of currency moves, the reliability of exchange rate forecasts remains an open question.

Exchange rate risk or foreign currency risk is the possibility that currency fluctuations can affect a firm’s expected future operating cash flows, i.e., its future revenues and costs. For companies desiring to take advantage of the growth opportunities derived from buying and selling in multiple currencies, effectively managing currency risk is an essential task. Exchange rate risk can be decomposed into: Pricing risk Accounting risk Transaction risk Operating risk Pricing risk refers to possible exchange rate fluctuations between the moment a company prices a transaction and the moment it is formally agreed. Accounting risk reflects changes in income statement and balance sheet items caused by currency fluctuations. Transaction risk refers to future FX-denominated cash flows that result from existing, contractually binding firm commitments (sales or purchase orders), whether or not the corresponding receivables/payables have been created. Operating risk measures the extent to which currency fluctuations alter the firm’s future operating cash flows, that is, its future revenues and costs. Finally, economic exposure comprises the two cash flow exposures: transaction exposure and operating exposure.

Exotic options are variations of simple call and put options. Traded in Over-the-Counter (OTC) markets, exotic options allow traders to manage risks in ways that ordinary options cannot achieve. A call option to buy a put option, also known as a Caput option, is a simple example of an exotic option. Other examples include chooser options, allowing a trader to decide whether the contract is a call or a put at some point over the contract’s life. Also, Asian options have no set strike price and are calculated as the average of some price listed in the contract and the market value of the underlying assets. Due to their complex nature, exotic options are not the most suitable products for corporate treasurers wishing to protect their profits from FX risk.

Under Hedge Accounting, a fair value hedge is a hedge of the exposure to changes in the fair value of a recognized asset or liability or unrecognized firm commitment, attributable to a particular risk and could affect profit or loss. (The other main type of hedge is the Cash Flow hedge).

Fedwire is the abbreviation for the United State’s Federal Reserve Wire Network, a real-time gross settlement funds transfer system that settles funds electronically between any of the United States banks registered in the Federal Reserve System. Each transaction is processed individually and settled upon receipt via a highly secure electronic network. Settlement of funds is immediate, final and irrevocable.

Financial statement translation is the process through which a firm restates, —in the currency in which a company presents its financial statements—, all assets, liabilities, revenues, expenses, gains and losses that are denominated in foreign currencies. This process of financial statement translation results in accounting FX gains and losses. There are three main financial statement translation methods available. With the current/noncurrent method, all the foreign exchange denominated current assets and liabilities are translated at the current exchange rate, while non-current assets and liabilities are translated at the historical exchange rate. With the monetary/nonmonetary method, monetary items such as cash, accounts receivable and payable, are translated at the current exchange rate, while nonmonetary items (inventory, fixed assets) are translated at the historical exchange rate. Finally, with the current rate method, all balance sheet and income statement items are translated at the current exchange rate. No matter what financial statement method is used, the resulting FX gains and losses are paper only, and rarely affect cash flows.

Fintech es un término formado por los vocablos ingleses “finance” y “technology”; tecnología y finanzas. Se aplica a aquellas empresas del sector financiero que se sirven de las últimas tecnologías para ofrecer productos y servicios pioneros e innovadores.

El concepto fintech ha adquirido gran relevancia en los últimos años y sus representantes han crecido exponencialmente, tanto en número como en cuota de mercado. Por ejemplo, la inversión global en empresas fintech se cuadruplicó desde los 3 millones de dólares en 2013 hasta los 12 millones en 2014.

La diversidad de servicios financieros que ofrecen las empresas fintech es amplia y se ha extendido con rapidez, desde los servicios de crédito hasta transferencias, gestión de inversiones y de capital.

Uno de los elementos característicos de las empresas fintech genuinas es la transparencia, a través de la cual buscan alterar el statu quo de un sector dominado por organizaciones tradicionales y en la mayor parte de los casos, de bajo desarrollo tecnológico.

El fuerte avance que ha experimentado el sector fintech y su crecimiento dentro del sector financiero tradicional tiene su raíz en los rápidos avances tecnológicos que han hecho posible esta innovación, pero no exclusivamente en este punto.

La crisis financiera global del 2007-09 ha tenido gran parte de la responsabilidad del crecimiento del sector fintech, principalmente debido a la restricción del crédito, que obligó a empresas y particulares a buscar vías alternativas de financiación, lo que contribuyó a crear uno de los servicios destacados de la industria fintech.

Estos son los principales servicios que ofrece el sector:

1. Transferencias de dinero
2. Financiación de capital
3. Créditos peer-to-peer
4. Tecnología móvil de pagos
5. Plataformas de trading e inversión

Hoy en día están surgiendo asociaciones de empresas fintech en los países en los que más desarrollado está el sector, con la finalidad de impulsar la inversión y la popularidad de sus servicios.

Fintech companies provide financial services using technological innovation. The rise of Fintech was made possible by the convergence of technological development and changes in financial regulation.Fintech companies essentially offer alternatives to traditional banking in services such as equity funding, lending, payments and foreign currency trading. What sets these new companies apart is their use of technologically sophisticated methods and an approach focused on the client, rather than on short-term profit.With that philosophy, the Fintech industry is challenging the traditional finance sector, which has long been dominated by banks, followed by brokers, wealth management firms, asset portfolio management firms and financial advisors.

A flexible forward contract, also known as an open forward contract, is a contractual agreement to buy or sell a specified amount of one currency against payment in another currency on or before a specified date in the future known as the ‘value date’. By contrast, when both parties are legally obliged to exchange the funds on the value date, the forward contract is said to be ‘fixed’, ‘closed’ or ‘standard’. In a flexible forward contract, the funds can be exchanged in one go (“outright”). Alternatively, several payments may be made over the course of the contract provided that the entire amount is settled by the maturity date. For example, a US company knows it will have to pay a number of invoices from a supplier based in the Eurozone during next year. I can decide to purchase a 12-month open USD-EUR forward contract, allowing it to make drawdowns to pay the supplier in euros, as and when necessary, over the course of the year.