Glossaire

The accounting currency is the monetary unit used by a firm to record its transactions and to present its financial statements. The accounting currency is also known as the reporting currency or presentation currency. In most cases, the accounting 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 accounting currency, it cannot change its functional currency.

Accounts payable are liabilities arising from the purchase of merchandise, supplies, and services on credit. Accounts payable require the company to make payment in the future. They are typically registered on the balance sheet when the firm receives an invoice. Accounts payable generally do not call for interest payments.Together with accounts receivable, accounts payable are the key input when a firm hedges balance sheet items in Micro Hedging Programs.

The UK Financial Conduct Authority (FCA) defines an authorised payment institution as a person authorised as a payment institution under the Payment Services Regulations and included in the Financial Services register to that effect.The Financial Conduct Authority is the regulator of the more than 50,000 firms offering financial services in the UK, including cross-border payment providers, to ensure that markets work efficiently for business and individuals and are honest, fair and effective towards consumers.

The base currency is the first currency appearing in a currency pair quotation. The second currency quoted expresses the number of units of that currency that are equal to one unit of the base currency. For example, if the EUR-USD is quoted at 1.25, EUR is the base currency, and USD is the quote currency.It means, in this example, that one EUR is worth 1.25 USD. In most quoting conventions, USD is the base currency for emerging market currencies: USD-BRL, USD-TRY, USD-RBL, etc. In futures markets, which are mostly based in the United States, the base currency is always the foreign currency.

The base currency interest rate is the short-term or money-market interest rate of the currency that, in a currency pair, is quoted first. For example, if the EUR-USD is quoted at 1.25, EUR is the base currency, and the money-market interest rate on EUR is the base currency interest rate. Alongside the money-market interest rate on the quoted currency, the base currency interest rate is used to calculate the forward exchange rate. When calculating the forward rate with the Interest Parity Theorem, the base currency interest rate features in the denominator of that well-known formula.

The bid-ask price is the difference in the price of one currency in terms of the other as shown by banks, brokers and dealers in the foreign exchange market. Banks do not normally charge a commission on their currency transactions, but they profit from the spread between the buying and selling rates on both spot and forward transactions.Quotes are always given in pairs because a dealer usually does not know whether a prospective customer is in the market to buy or to sell a foreign currency. The first rate is the ‘bid’ (or buy) price; the second is the ‘ask’ (or offer) rate. As an example, if GBP-USD is quoted at 1.3018-1.3027, it means that the bank is willing to buy GBP at 1.3018 USD and sell them at 1.3027. A customer of the bank can be expected to sell GBP to the bank at 1.3018 USD and buy them at 1.3027 USD. The dealer will profit from the 0.0009 USD spread between the bid and ask rates.

A blocked currency, also known as a non-convertible currency, is the monetary unit of a country where holders of the currency do not have the right to convert it freely at the going exchange rate into any other currency. A currency is considered to be blocked if it fulfills one or more of the following three criteria about usability, exchangeability and market value:it cannot be used for all purposes without restrictions;it cannot be exchanged for another currency without limitations;It cannot be exchanged at a given exchange rate.

A break forward, also known as cancellable forward, cancellable option or knock-on forward, is an option-like contract used to obtain full participation in a market move in the underlying (for example, a currency) beyond a specified level without payment of an explicit option premium.Break forwards are rarely used when hedging regular foreign currency inflows and outflows. They can be an efficient hedge tool, however, in the event of possible, but contingent, business events.

The Budget Reference Rate, commonly known as the ‘budget rate’, is the foreing exchange rate used by a company in its budget. It can be the current spot rate, the current forward rate, an off-market rate, or a market-consensus rate. Even if a firm does not use an explicit benchmark, its budget necessarily contains at least an ‘implicit’ FX rate if foreign currency-denominated transactions are planned.For firms that set stable prices for the year at the start of their annual budget, the budget coincides with the annual ‘campaign’. In this case, protecting the budget rate (with FX hedging) is the same as protecting the campaign rateHowever, in firms that conduct more than one campaign per budget period —for example, a fashion company with several collections or ‘seasons’ per year— an important distinction arises. To the extent that they need to protect a budget rate, this rate should be the budget rate of each individual campaign, rather than the annual budget rate.

Business foreign exchange refers to the trading of currencies for purposes of real international trade of goods and services, in contrast to the vast majority of FX trades, which are purely speculative.This activity represents less than 2% of the USD5.3 trillion exchanged daily on the global FX market, while speculative trading accounts for the remaining 98%.Companies that operate across borders might carry out business foreign exchange. Exporting to a foreign market, buying or selling assets from abroad and paying employees and consultants are just some of the international transactions that require business foreign exchange.Some companies still manage these FX needs manually using banks or brokers as intermediaries, a rather inefficient process that too often involves hidden charges and spreads.The advent of Fintech has seen new alternatives emerge. Technologically advanced companies are increasingly adopting more efficient FX risk management systems, like Dynamic Hedging, that allow them to automate their FX needs with minimal effort.