Glossaire

IBAN is the acronym for an International Bank Account Number, a universally recognised alphanumeric code used to identify a bank account. IBAN was designed to simplify international transactions, facilitate cross-border communication between banks and minimise the risk of transcription errors. An IBAN comprises up to 32 alphanumeric characters, includes a two-letter country code, two check digits and the detailed bank account-number used in wire transfers. This latter element is the longest section of the IBAN code, and is known as the Basic Bank Account Number (BBAN).

An international transaction is a cross-border trade agreement or a credit operation that requires settlement in a foreign currency. In the chronology of a typical international transaction involving the exchange of goods or services, the settlement date is the last stage. It is preceded by other stages, such as forecasting, pricing, contracting (SO/PO, sales order/payment order) and recording (AR/AP, accounts receivable/payable). To calculate their exposure to FX risk involved in international transactions, companies draw detailed transaction exposure reports that include not only the trade receivables and payables that are already on their balance sheet, but also the forecasted futures sales and purchases, and any other foreign currency-denominated receipts and disbursements. The foreign exchange risk created by international transactions is best managed with Currency Automation Management solutions that allow firms to monitor FX exposure and automatically hedge transactions, whatever their number, and whatever the number of currency pairs involved.

In corporate treasury, an invoice batch is a bundle of different invoices put together by the payer to be processed as one. Invoice batching improves process efficiency, saving time and effort by skipping repetitive tasks like data input and ultimately reducing the risk of human error.

A Key Risk Indicator or KRI is a measure used in management to assess the degree of risk involved in the different areas of activity of an organisation. KRIs work as indicators of events that might have harmful effects on a company or its activity. KRIs are typically measurable, i.e., they can be quantified in terms of percentages, numbers etc. They are predictable and are often used as early warning signals, while also tracking trends over a period of time. In a certain sense, KRIs could be understood as the antithesis of Key Performance Indicators (KPIs). While KPIs show how well a company is doing, KRIs are designed to warn management about potential sources of risk.

A knock-in forward is a derivative that offers buyers a more attractive rate than a regular forward and includes a condition that the exchange rate must hit a defined knock-in level during the contract. If the “Knock-in level” is not reached, the transaction will not be made on the maturity date.Due to their complex character, knock-in forwards are not the most suitable products for corporate treasurers wishing to protect their profits from FX risks. There are more efficient alternatives like Dynamic Hedging.A Knock-In Forward includes the following elements:Financial Asset: EUR/USDPosition at Maturity: EUR/USD shortAmount: 1,000,000Spot Rate: 0.9350Forward Rate: 0.9275Knock-in Forward Rate: 0.9150Knock-in Level: 0.9050Tenor: 6 monthsDespite the name ‘forward’, this mechanism is more akin to a speculative options contract*. The buyer aims to secure a more convenient rate than a regular forward but risks “losing” the contract. If the knock-in rate is not attained, the contract will be cancelled and their business will not be protected against currency volatility.

An FX Knock-in Option contract allows the buyer to purchase a foreign currency on a future date, and at a pre-defined rate that’s better than the regular forward rate, on condition that the exchange rate hits the Knock-in level at any time during the contract.Due to their complex character, knock-in options are not the most suitable products for corporate treasurers wishing to protect their profits from FX risks. There are more efficient alternatives like Dynamic Hedging.Knock-in options include the following elements:Financial Asset: EUR/USDPosition at Maturity: EUR/USD shortAmount: 1,000,000Spot Rate: 0.9350Forward Rate: 0.9275Knock-in Option Rate: 0.9150Knock-in Level: 0.9050Tenor: 6 monthsKnock-in options are speculative products, as they do not provide guaranteed protection from currency volatility. If the Knock-in level is not attained, the option will not be activated and the buyer will remain exposed to currency volatility.

A Knock-out Forward is a derivative financial product through which the issuer offers the buyer a more attractive rate for a specific maturity date than a regular forward on condition that the exchange rate does not hit the Knock-out level during the contract. If the Knock-out level is attained, the contract is automatically cancelled and the transaction will not take place.Due to their complex character, knock-out forwards are not the most suitable products for corporate treasurers wishing to protect their profits from FX risks. There are more efficient alternatives like Dynamic Hedging.Knock-out forward contracts include the following elements:Financial Asset: EUR/USDPosition at Maturity: EUR/USD shortAmount: 1,000,000Spot Rate: 0.9350Forward Rate: 0.9275Knock-out Option Rate: 0.9150Knock-out Level: 0.8800Tenor: 6 monthsDespite the name ‘forward’, a knock-out is actually a speculative options contract* and therefore not the most suitable option for a prudent CFO aiming to hedge against currency volatility. If the Knock-outrate is reached, the option will be cancelled and the buyer will remain exposed to currency volatility.

An FX Knock-out Option is a contract through which an issuer commits to sell a foreign currency on a future date at a more attractive pre-defined rate than the standard forward rate, on condition that the exchange rate does not hit the Knock-out Level at any time during the contract.Due to their complex character, knock-out options are not the most suitable products for corporate treasurers wishing to protect their profits from FX risks. There are more efficient alternatives like Dynamic Hedging.

Knock-out options include the following elements:

Financial Asset:  EUR/USD

Position at Maturity:  EUR/USD short

Amount:  1,000,000Spot Rate:  0.9350

Forward Rate:  0.9275

Knock-out Option Rate:  0.9150

Knock-out Level:  0.8800

Tenor: 6 months

Knock out options are speculative products that do not guarantee to hedge against FX risk. If the exchange rate hits the Knock-out level, the option will be cancelled and the buyer will remain exposed to currency volatility.

A layered hedging strategy is an FX hedging program designed for firms that require continuity on pricing period after period, i.e. firms that need to keep prices constant—even on the back of an adverse intra-period currency movement known as a ‘cliff’. Firms in this scenario need to achieve a smooth hedge rate over time. In order to achieve a smooth hedge rate, successive layers of hedges are applied as time passes (for example, 1/12 of the exposure is hedged every month). The resulting commonality in hedge rates creates a ‘smooth hedge’. Depending on the goals of the firm, on the reliability of its forecasts, and on the forward points situation, layered hedging programs can be adjusted and combined with programs that hedge firm commitments (sales/purchase orders) and balance sheet items (accounts receivable/payable). These programs and combinations of programs can be very demanding in terms of calculations and/or currency trading, a real challenge for treasury teams relying on manual procedures. Their proper implementation and management requires, therefore, the application of Currency Management Automation solutions.