Glossaire

In the process of translating foreign-currenecy denominated assets and liabilities into a firm’s functional currency, non monetary items are foreign-exchange denominated physical assets such as inventory and fixed assets that cannot be easily converted into cash or cash equivalents. By contrast, monetary assets and liabilities are items that represent a claim to receive, or an obligation to pay, a fixed amount of foreign currency units. In the monetary/non monetary method of translation for the balance sheet, monetary items are translated at the current rate, while non monetary items are translated at historical rates.

In FX futures markets, the notional amount or notional value of a contract represents the value of the futures position at any point in time. If contract size for the EUR contract is EUR 125,000 and the exchange rate for September delivery is EUR-USD 1.18705, the September contract has a notional value of $ 148,381.25 = 125,000 x 1.18705. The value is said to be ‘notional’ because delivery actually almost never takes place in currency futures. However, it is needed to calculate the P/L of the position. In interest rate swaps, the principal amount is used to calculate the cash flows of the swap, but because it is not actually exchanged, it is called ‘notional’.

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’ closed’ or ‘standard’. In an open 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.

In FX hedging with futures contracts, the optimal hedge ratio is the number of futures contracts required to hedge a given exposure. As an example, a Candadian farmer has signed a contract to sell 800,000 pounds of live cattle to a U.S. supermarket in three months’ time, at USD 1.65/pound. The spot USD-CAD rate is 1.1111. What number of contracts should be used to hedge the resulting CAD 1,466,652 exposure? If contract size is CAD 100,000, then the farmer should buy 14.7 contracts, which is then rounded to 15.

Other comprehensive income is part of the ‘Statement of comprehensive income as defined in the rules set by the International Accounting Standards Board (IASB). The statement of comprehensive income extends the conventional income statement to include certain other gains and losses that affect shareholders equity. Among the gains and losses recorded in ‘Other comprehensive income’ are unrealised FX gains and losses.

An outright forward contract is a contractual agreement to buy or sell a specified amount of one currency against payment in another currency at a specified date in the future known as the ‘value date’. By contrast, when both parties can exchange the funds before the value date, the forward contract is said to be ‘open’. Sometimes known as a ‘fixed’ or ‘standard’ contract, the outright forward is the simplest type of forward contract. For this reason, these forwards are widely used by businesses to hedge against the risk of losses due to adverse exchange rate movements. However, hedging with outright forwards makes it impossible to benefit from advantageous exchange rate movements. Outright forwards also offer no flexibility about the date of settlement. Both parties are legally obliged to exchange the funds on the value date. Businesses that need more flexibility over payment terms may prefer open or ‘flexible’ forward contracts.

Over-hedging describes the situation of a firm that has hedged in anticipation of an exposure that has failed to materialise completely. Over-hedging is common in companies with low forecast accuracy that apply static hedging, with a big hedge taken at the start of the period. If these positions. Firms that find themselves in a situation of over-hedging should unwind some of their hedges in order to free up collateral and increase the firm’s borrowing capacity—a top-priority in situations of stress in credit markets. Over-hedging can be overcome with the right budget hedging program or combination of programs that mix elements of static and dynamic hedging.

Over-the-counter derivatives (OTC derivatives) are financial contracts —such as forwards, swaps and options— that are traded through a dealer network rather than through a centralised exchange. The lack of an exchange that guarantees all trades means that the parties to an OTC transaction are exposed to counterparty risk.  While currency forward contracts are ‘over-the-counter’, futures contracts are ‘exchange-based’. Most companies, when hedging their FX exposure, rarely choose futures contracts. Instead, they rely on over-the-counter forward contracts, which are used in Currency Management Automation solutions.

A partially convertible currency is the monetary unit of a country where holders of the currency face legal constraints to convert it freely at the going exchange rate into other currencies. A currency is said to be partially convertible if one or more of the following three criteria about usability, exchangeability and market value are not fully enforced: it can be used for all purposes without restrictions; it can be exchanged for another currency without limitations; It can be exchanged at a given exchange rate.

Payment automation refers to a system for processing payments through software technology with minimal or no manual interaction.Payments Automation for International BusinessesInternational companies often rely on a global supply chain or have an extensive network of foreign suppliers. These practices may involve significant amounts of international payments, demanding a good deal of time and effort from the treasury department.In these cases, some companies implement technological tools to automate payment processing, minimising the workload of the treasury team and reducing human error.