Glossaire

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.

A Leveraged Forward contract is an over-the-counter derivative product that allows holders to lock-in more favourable exchange rates than an outright forward for part of their exposure as well as to benefit from favourable market movements using leverage. The leverage defines the amount of risk the hedger is willing to assume. Due to their complex character, leveraged forwards are not the most suitable products for corporate treasurers wishing to protect their profits from FX risks. Leveraged forwards can have a negative market value and may involve costs if holders want to close out the position prior to contract expiration.

In FX trading, leverage trading refers to the use of credit —extended by the dealer or trading platform— aimed at magnifying the notional value of a position. If a trader has a given amount of margin in deposit, he or she is allowed to speculate on a notional amount that can be many times as large. Some retail forex brokers allow traders to open accounts and, upon depositing a margin amount, they can trade in a large multiple of the margin amount. For instance, 5:1, 10:1 or 50:1. This is why leveraged trading is like a double sword: both gains and losses are amplified by the effect of leverage. Leveraged trading is a popular, but highly speculative activity that has nothing to do with FX hedging.

A line of credit is a loan facility agreement between a lender and a borrower. A total amount is agreed for the credit line.It is extended to creditworthy customers by banks and money lenders.Lines of credit form an integral function in assisting businesses in completing purchasing operations.Advantages to using a line of credit over a loan1. A line of credit allows the borrower to draw down as many times as they need to, up to the maximum amount permitted.2. Unlike a loan, interest on a line of credit is only charged on the actual credit that is used. Any available credit not used up does not incur any interest payment.A line of credit is often used in conjunction with a letter of credit obtained from the same money lender when making international transactions.

In corporate finance, liquidity ratios measure the level of assets that can be quickly and cheaply converted into cash and their proportion to the firm’s short-term obligations. Because the book value of liquid assets is usually reliable, liquidity ratios allow investors to get a picture of a firms’ liquidity position. The most widely used liquidity ratios are the current ratio, the quick ratio and the cash ratio. In these three ratios, the denominator is the level of current liabilities. The current ratio is simply the ratio of current assets to current liabilities. Because some current assets are closer to cash than others, inventory is subtracted from the numerator (of the current ratio) when calculating the quick ratio, which is also known as the ‘acid test’. Finally, the cash ratio is even more stringent, as it only includes cash and marketable securities in the numerator. While investors generally applaud firms with strong liquidity ratios, an excess of liquidity can indicate sloppy use of capital.

In corporate finance, liquidity risk is the risk that a firm may not be in a position to lay its hands on the cash needed to meet its short-term obligations. To assess liquidity risk, investors look at several financial ratios, including the current ratio, the quick ratio and the cash ratio.

Live exchange rates are real time spot and forward currency quotes provided by liquidity providers such as banks, FX brokers and dealers, and multi-dealer trading platforms. Live exchange rates allow managers to monitor their FX exposure and to execute hedges when required. By connecting to providers of live exchange rates, Currency Management Automation solutions allow managers to monitor their exposure in real time, 24/5, in any currency pair, and for any number of transactions.

For a company that operates internationally, local currency payments are transactions that are priced, invoiced and settled in the local currency of a client (sales transactions, or exports) or supplier (purchase transactions, or imports), rather than in the firm’s own functional currency. On the contracting side, buying capacity in the local currency immediately results in a wider range of inventory choices. Crucially, it allows firms to avoid costly markups charged by suppliers who seek to protect themselves from FX risk when forced to sell in a foreign currency. On the selling side, firms that sell in the local currency avoid passing on FX markups to their clients, gaining competitiveness and expanding sales. Finally, in terms of pricing, there are several ways in which the FX-savvy travel firm can take advantage of forward points, the difference between forward and spot currency rates. Operating in the currency of clients/suppliers presupposes effective FX hedging. Depending on a company’s specific parameters, Currency Automation Management solutions allow managers to design the hedging programs that best protect them for currency risk, in an automated manner.