Glossaire

A short currency is the creation of an offsetting short FX position with forward contracts, in order to neutralize any gain or loss on an original ‘long’ currency exposure by a corresponding foreign exchange loss or gain on the hedge. For example, a U.S.-based exporter sells EUR 100,000 of goods worth to a European customer is said to be ‘long’ EUR since EUR will be received from the sale. In order to hedge that position, the firm undertakes a short currency hedge by selling an equivalent amount of EUR in the forward market, with a value date matching the settlement of the business transaction.

The shortcut method is a qualitative method of analysis approved only by the US accounting standards to test the effectiveness of a hedge relationship. In order to adopt hedge accounting, companies may use quantitative methods like the dollar offset method or qualitative methods, the most common of which are the critical terms match (CTM) method. The shortcut method exempts companies from having to prove the future and continuing effectiveness of a hedge if they meet a set of criteria. It is accepted in cases when the hedging relationship involves interest rate swaps and meets a series of very specific criteria. These limitations in effect restrict its use to certain types of simplified hedging relationships involving interest rate risk.

The Single Euro Payments Area (SEPA) is the geographical area where cashless EUR payments across Europe are harmonised. SEPA allows European consumers, businesses and public administrations to make and receive —under the same basic conditions— credit transfers, direct debit payments and card payments. The purpose of SEPA is to make all cross-border payments in EUR as easy as domestic payments. Covering the whole of the EU, SEPA also applies to payments in EUR in other Andorra, Iceland, Norway, Switzerland, Liechtenstein, Monaco, San Marino and Vatican City State.

A soft peg describes the type of exchange rate regime applied to a currency to keep its value stable against a reserve currency or a basket of currencies. Currencies with a soft peg are halfway between those with a fixed or hard pegged exchange rate and those with a floating exchange rate. The main difference between soft and hard pegged currencies is that the soft peg systems provide a limited degree of monetary policy flexibility to allow governments and central banks to deal with economic shocks.Practical examples of soft pegsA soft peg can be applied to the reserve currency within a narrow (e.g. 1%) or a wide (e.g. -25-25%) range and can sometimes be modified over time, usually in relation to variations in international inflation rates.Soft peg currencies include the Chinese yuan, an interesting soft peg currency as it is softly pegged to the U.S. dollar while also being a reserve currency, the Venezuelan bolivar and the Hong Kong dollar (which are both pegged to the U.S. dollar).Any kind of peg can be vulnerable to financial crises - which can result in a significant devaluation or even lead institutions to abandon the peg. Notorious examples of events like these are the Argentinian crisis of 2001 of the Swiss National Bank's decision to abandon the euro peg in 2015.

Stagflation is a term used to describe an economy that is stagnant and experiences little to no economic growth.Signs of stagflation include high rises in the price of consumer goods and services through high inflation, a reduction in gross domestic product and high unemployment.It is exceptionally difficult to move a country out of a stagflated economic state, as the methods used to promote greater economic growth - for instance, to lower inflation - may have a detrimental effect on unemployment figures.Stagflation in JapanJapan's economy has remained largely stagnant since 1990, after a national asset price bubble crisis. The nineties became known as Japan's "lost decade", which has now stretched out over the better part of three decades, as the country has still not been able to return to sustained economic growth.Successive Japanese governments have attempted a plethora of policies in order to try to kick-start the economy, largely to no avail.

In the terminology of fx risk management, a stop-loss order is triggered whenever an adverse movement in the exchange rate automatically triggers the execution of a forward contract aimed at protecting the exposure against further unfavourable movements. When protecting the budget, Stop Loss orders are often set by management when the firm faces a scenario of unfavourable forward points. In such a situation, delaying hedges makes sense.

When the market rate reaches the ‘tolerance level’ set by the firm’s risk managers, the stop-loss order is triggered and the hedge is executed.  Because it is triggered only if a certain level of the exchange rate is met, a stop-loss order is said to be a conditional order. In Currency Management Automation, stop-loss orders are paired with take-profit orders (another type of conditional order) aimed at locking-in favourable exchange rate movements.  

In order to avoid duplicating the volume of hedging, stop-loss and take-profit orders automatically cancel each other. For this reason, they are known as ‘OCOs’, or One-Cancels-the-Other.

A subsidiary is a company, corporation or limited liability company whose controlling interest is owned by another company.The company with a controlling interest (more than 50% of the subsidiary's voting stock) is known as the parent company.The subsidiary, which is recognised as a legal entity in its own right, must comply with the national laws, and any local laws if necessary, of where it is located, regardless of where the parent company is based.One of the dilemmas faced by any company going international and setting up a subsidiary in a country with a different currency to that of the parent company is currency management. The equities, assets and liabilities of the subsidiary are subject to foreign currency risk if they need to be converted into the parent company's functional currency for accounting reasons.Depending on the company’s internationalisation strategy, it may be more advantageous to finance the subsidiary directly from the parent company, or for the subsidiary to bank locally.

Swap automation makes reference to the automated coordination and adjustment of payment and collection timing to optimise cash flow management in conjunction with foreign exchange hedging activities. This technology ensures that settlement dates for hedging instruments align optimally with underlying commercial cash flows, reducing funding costs and improving overall treasury efficiency whilst maintaining hedge effectiveness.

Ensuring a perfect match between the settlement of commercial transactions and the corresponding FX hedges —especially if the latter were taken long before— is next to impossible. To bridge the gap between these positions, swapping is necessary. It is the ‘cash flow moment’ of FX risk management. Swaps allows treasury teams to either: perform early draws on existing forwards or roll over existing forward positions.

However, swapping is complex and resource-intensive. This complexity carries operational risks —including fraud risk— derived from manual execution. That is why they need swap automation to free up resources and remove a series of operational risks and costs. Whether they need to anticipate or roll over FX derivatives transactions linked to payments/collections, treasurers can execute the process in just one click using Kantox’s Currency Management Automation solution.

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The tail risk is the probability and potential impact of extreme, low-probability currency movements that fall outside normal market expectations and could cause disproportionately large losses. Tail risk events are characteristically unpredictable and can overwhelm standard hedging strategies, requiring specific consideration in risk management frameworks and potentially specialised hedging approaches or contingency planning.

Lack of automation may lead finance teams to neglect some currency pairs that can be a major source of FX risk.

In fx risk management, a take-profit order is a conditional trading instruction that automatically secures favourable exchange rates when markets move in the organisation's favour beyond specified levels. These type of conditional orders enable companies to benefit from positive currency movements whilst maintaining systematic budget rate protection, effectively allowing for potential outperformance of budget targets when market conditions are advantageous.

In Currency Management Automation, take-profit orders are paired with stop-loss orders (another type of conditional order) aimed at locking-in favourable exchange rate movements. In order to avoid duplicating the volume of hedging, stop-loss and take-profit orders automatically cancel each other. For this reason, they are known as ‘OCOs’, or One-Cancels-the-Other.

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A target redemption forward is a foreign exchange product that allows the holder, usually a corporate, to buy or sell a currency at an enhanced rate for a number of expiry dates, with zero upfront premium. The product automatically expires if the enhanced rate reaches a target level. But if spot moves in the wrong direction, holders can be forced to trade regularly at unfavourable rates for the full life of the product. Target Redemption Forwards are not the most appropriate hedging instrument for a company looking to minimise exchange rate risk. Companies looking for protection themselves against FX risks should opt for more straightforward alternatives like outright forwards or flexible forward contracts.