Glossaire

The delivery date, also known as the value date or maturity date, is the final date by which the currency that was sold in a forward or futures contract must be delivered for the terms of the contract to be fulfilled. In a forward contract, the delivery date (and the underlying amount of currency) can be agreed upon by the parties. By contrast, both the delivery date and the underlying amount per contract are standardised in currency futures contracts. In an open forward contract, delivery can occur before the originally agreed upon delivery date. When both parties are legally obliged to exchange the funds precisely on the delivery date, the forward contract is said to be’ closed’ or ‘standard’.

A dirty float (also known as ‘managed float’) is an exchange rate regime in which the exchange rate is neither entirely free (or floating) nor fixed. Rather, the value of the currency is kept in a range against another currency (or against a basket of currencies) by central bank intervention. By far the most significant system of ‘dirty’ or ‘managed’ float in recent years is the Chinese currency regime. At the start of each trading day, China’s central bank sets a ‘reference rate’ against which the renminbi is allowed to rise or fall no more than 2 per cent against USD in onshore trading. A ‘managed float’ system gives the central the power to set a corridor for the exchange rate, in order to avoid situations of currency over- or under-valuation. In order to be credible, a ‘managed float’ system has to be managed by an autonomous or semi-autonomous central bank with a high level of FX reserves, strong credibility. Above all, the target corridor for the exchange rate should not be too far away from market-based levels.

The dollar offset method is one of the accounting procedures recognised by the International Accounting Standards Board (IASB) to test the effectiveness of a hedging relationship. At each reporting period, the fair value of the forecast transaction (hedged item) and the fair value of the hedging instrument are measured. The resulting differences are recognised in profit or loss (for the ineffective part of the hedge) or in other comprehensive income as a cash flow hedge reserve (for the effective part of the hedge).

In FX forward markets, a drawdown refers to the act of performing an early draw, i.e. exchanging a portion of the total amount specified in a flexible FX forward contract before the expiration of the contract.The period in which the contract holder can activate such drawdowns, for example three months, is established in the contract terms. Flexible forward contracts are an effective method of hedging against currency risk, and allow the contract holder to make regular payments using the same exchange rate for a specific time period. They can therefore be useful for companies that make regular payments to an overseas supplier

Created by Kantox, Dynamic Hedging is a Currency Management Automation software solution that eliminates all or most FX risk and enables managers to capture the growth opportunities that result from buying and selling in local currencies. By keeping FX risk at bay, Dynamic Hedging allows firms to take control of their own competitiveness.  Dynamic Hedging automates —in accordance with business rules defined by each company— the three phases of the hedging process: pre-trade (exposure collection and monitoring), trade (forward transaction execution), and post-trade (reporting management). For this reason, Dynamic Hedging is known as an ‘end-to-end’ solution.

Kantox’s Currency Management Automation solutions integrate Dynamic Hedging and allow companies to deploy the hedging programs that best responds to the needs of the business, taking into account the firm’s pricing parameters, degree of forecast accuracy, and situation in terms of forward points.

Whether a company desires to protect its budget from FX fluctuations with static, rolling or layered programs, or whether it aims at ‘microheding’ its many foreign currency-denominated transactions, Dynamic Hedging ensures that the firm systematically achieves its risk management goals.

An early draw involves exchanging a portion of the total amount specified in a flexible FX forward contract before the expiration of the contract.The period in which the contract holder can activate early draws, for example three months, is established in the contract terms. Flexible forward contracts are an effective method of hedging against currency risk, and allow the contract holder to make regular payments using the same exchange rate for a specific time period. They can therefore be useful for companies that make regular payments to an overseas supplier.

ECB exchange rates are a set of daily foreign exchange rates, published by the European Central Bank (ECB), that are used as reference by companies and other participants in FX markets. The reference rates are usually updated around 16:00 CET on every working day on the ECB website. ECB exchange rates are based on a regular daily concertation procedure between central banks across Europe, which normally takes place at 14:15 CET. All currencies are quoted against the euro, the base currency. ECB exchange rates are published for information purposes only. They are often used for the annual financial statements of corporations, tax returns, statistical reports and economic analyses.

The economic calendar is a schedule of the most relevant economic events followed by investors. These events often have a significant impact on the financial markets and currency volatility.Foreign exchange markets are most affected by monetary and fiscal policy announcements, as well as by financial reports. A currency calendar allows investors to know what is going to happen when.Some of the most important events for the currency market include the US non-farm payroll reports, inflation figures and changes in interest rates. Investors also scrutinise central bank meetings and statements for even slight indicators of impending monetary policy.

Economic exposure to foreign exchange risk is the extent to which the present value of a firm’s expected future cash flows is affected by exchange rate changes. Economic exposure comprises two cash flow exposures: transaction exposure and operating exposure. Transaction exposure reflects future FX-denominated cash flows that result from already existing, contractually binding, sales or purchase orders (SO/PO), whether or not the corresponding receivables/payables have been created. Operating exposure measures the extent to which currency fluctuations alter the firm’s future operating cash flows, that is, its future revenues and costs. Operating exposure may arise even in a firm with cash flows denominated solely in its home currency, if its costs and/or price competitiveness are affected by FX fluctuations.

Economic exposure management is the set of hedging programs, pricing strategies and other measures taken by companies to protect themselves from the effects of adverse currency fluctuations. Economic exposure comprises two cash flow exposures: transaction exposure and operating exposure. Transaction exposure can be managed by implementing the adequate hedging program or combination of hedging programs. The details of each program vary according to the pricing dynamics, the weight of FX in the business, the location of competitors, and the situation in terms of forward points. Operating exposure can be managed by adjusting the firm’s market selection, pricing policy and product mix. With the appropriate hedging programs, many firms have the opportunity to ‘embrace currencies’ —buying and selling in the currency of their suppliers and clients—, thus expanding market share while protecting profit margins.

Economic Value Added (EVA) is an economic performance metric that results from comparing a firm’s return on capital ROC with its cost of capital r. In its simplest version, the formula is: EVA = (ROC - r) x Total capital When a firm’s return on capital exceeds its cost, the performance is satisfactory from investors’s point of view. Currency management can affect EVA in a variety of ways. ROC can be enhanced by buying and selling in foreign currencies, while a solid risk management process could lead —everything else remaining equal— and to a lower r. Both impacts would create more Economic Value Added.