Glossaire

ISO 4217 is the standard established in 1978 by the International Organization for Standardization which defines the rules to create the three-character codes representing each one of the world currencies in circulation (except for several minor currencies, that are pegged to a bigger one).ISO 4217 is the code used by banks and businesses internationally to designate different currencies as well as airline tickets or other international travel tickets to avoid confusion with the price.The code is formed by three characters, the first two representing the country, while the third one represents the name of the currency. For instance, the code for the Australian Dollar combines the first two letters of the country (AU) and the third letter, (D) for the dollar.In the foreign exchange market, these codes eliminate potential confusion caused by common currency names shared like the dollar, peso, pound, or krona.

Inflation is an economic concept referring to the pace at which the prices of goods and services increase over time.A low, sustainable level of inflation is crucial for healthy economic growth, and therefore one of the main objectives of central banks' monetary policy is to maintain inflation close to a 2% annual rate.Inflation, however, reduces the purchasing power of the currency and so it may have very negative economic consequences if it rises too quickly.In some cases, sharp declines in foreign exchange rates have led to soaring import prices and ultimately to ballooning inflation. Venezuela and Zimbabwe are two examples of how these dynamics can hurt national economies. In these cases, when inflation reaches uncontrolled, very high levels, it is termed hyperinflation.On the other hand, low inflation can be equally detrimental to economic health. One danger is that inflation may lurch into deflation – a generalised decrease in prices of goods and services – which can bring untold problems to an economy. For example, Japan has been stuck in a deflationary cycle in recent years, keeping economic growth very low.

Interest rate risk is risk that moves in interest rates affect the value of fixed-income instruments such as bonds. Because the value of a bond is the present value of its discounted cash flows, an increase in interest rates (used as discount rates) automatically translates into a lower present value. In banking, interest rate risk is assessed both in terms of assets and liabilities. If, for example, short-term interest rates rise while long-term interest rates stay stable or fall, the net interest margin —and the bank’s profitability— would decline as a consequence.

An interest rate swap is an agreement between two parties to exchange interest payments (in the same currency) for a specific maturity on an agreed-upon notional amount. No principal is exchanged in an interest rate swap. The notional amount or notional principal is a reference amount needed to calculate the interest rate. The most common type of interest rate swaps are fixed-to-floating swaps, in which party A receives floating-rate payments from party B in exchange for fixed-rate payments from A to B. This is done in order to achieve savings on the total interest cost, as one party usually has a comparative advantage in borrowing at a fixed or floating rate. Using this relatively straightforward mechanism, interest rate swaps transform debt issues, assets and liabilities from fixed-to-floating or vice-versa.

The International Accounting Standards Board (IASB) is an independent body responsible for the development and publication of a single set of global accounting rules. The rules, designed to provide transparent and comparable information in financial statements, are known as International Financial Reporting Standards (IFRS). The rules deal with the following points: . What information should be disclosed . How information should be presented . How assets should be valued . How profit should be measured The IASB’s hedge accounting guidance is known as IFRS 9. It aims at simplifying hedge accounting, aligning it more closely with entities’ risk management activities, and providing decision-useful information about an entity’s risk management strategies.

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.