Glossaire

Business foreign exchange refers to the trading of currencies for purposes of real international trade of goods and services, in contrast to the vast majority of FX trades, which are purely speculative.This activity represents less than 2% of the USD5.3 trillion exchanged daily on the global FX market, while speculative trading accounts for the remaining 98%.Companies that operate across borders might carry out business foreign exchange. Exporting to a foreign market, buying or selling assets from abroad and paying employees and consultants are just some of the international transactions that require business foreign exchange.Some companies still manage these FX needs manually using banks or brokers as intermediaries, a rather inefficient process that too often involves hidden charges and spreads.The advent of Fintech has seen new alternatives emerge. Technologically advanced companies are increasingly adopting more efficient FX risk management systems, like Dynamic Hedging, that allow them to automate their FX needs with minimal effort.

Cash collection, also known as payment collection, is a treasury function that describes the process whereby a company recovers cash from other businesses (or individuals) to whom it has previously issued an invoice. The key objective of cash collection is to get invoices paid on their due date. New payment settlements or credit terms also need to be managed, in order to avoid debts becoming ‘doubtful’ or ‘bad’. In the case of companies with significant volumes of payments, manual collection and reconciliation processes can be an arduous and time-consuming process, better managed with software-based solutions.

Cash Concentration is a corporate treasury management technique involving the transfer of all funds from different accounts to a single, centralised account to increase cash management efficiency and reduce fees. There are numerous advantages to concentrating all available funds into a single account. Businesses can improve the visibility and availability of their funds and gain more control over deposits from diverse locations while ensuring that no funds are lying in bank accounts that don’t generate interest. Cash concentration also reduces bank service charges to those of the central account and makes it simpler to monitor cash flows.

Cash Flow at Risk (CFaR), in the context of foreign exchange, is a measure of the extent to which future cash flows and operating profit margins may fall short of expectations as a result of currency fluctuations. CFaR calculations take into account the volatility of the currency pairs in the exposure and their correlation, in order to measure the cash-flow and/or operating margin impact of an adverse change in currency rates.

A cash flow hedge is a hedging program designed to protect a company’s expected future revenues and costs from currency fluctuations. Cash flow hedges are concerned with a firm’s economic exposure. A firm may undertake cash flow hedges to protect its budgeted exposure from FX risk.  Depending on a company’s specific situation in terms of its pricing dynamics, degree of forecast accuracy and other parameters, different types of cash-flow hedging programs can be designed to protect budgeted exposures.

These include static hedging, rolling hedging, layered hedging, hedging based on firm commitments, balance sheet items hedging, and different combinations of such programs.  When hedging cash flows under Hedge Accounting, companies need to provide documentation regarding the hedged item, the hedging instrument and the methodology used to test the effectiveness of the hedge.  

The implementation and management of cash flow hedging programs may be quite burdensome for treasury teams that rely on manual exposure collection and hedge execution. However, Currency Management Automation solutions allow firms to run cash flow hedging programs on a fully automated basis.

Cash management is concerned with selecting the optimal combination of current assets —cash, marketable securities, accounts receivable and inventory — and current liabilities, or short-term funds to finance those current assets. For companies with international operations, cash management must take into account the impact of currency fluctuations.  

Cash management can be organised on a decentralise basis with autonomous operating units, or by means of a fully centralised cash management program. Decentralising allows the corporation to operate with a smaller amount of cash and allows it to reduce FX transaction costs by increasing the volume of FX transactions. It can also lead to cost-saving in terms of payments netting.

For big firms with subsidiares located around the world, centralising treasury operations has certain cash benefits. In practice, this means having the Head Office/ Headquarters (HQ) take responsibility for the liquidity needs of affiliates/subsidiaries. FX centralisation solutions like Kantox In-House FX allow group treasurers to obtain full visibility of cash flow FX exposures across the enterprise, whatever their source.

Cash pooling is a centralised cash management technique where a company or group of companies consolidates their cash balances into a centralised account. This practice optimises liquidity management by effectively combining surplus funds from some accounts with deficit balances in others.

By maintaining a single master balance with each banking partner, organisations can minimise interest expenses, reduce transaction costs, maximise interest earnings, and improve overall financial visibility. Cash pooling enables more efficient capital allocation, enhanced forecasting capabilities, and stronger negotiating power with financial institutions.

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A central bank is a government-sponsored entity entrusted with the issuance and management of a country's currency. In the case of the Eurozone, the central bank is a pluri-national entity. Because they have a monopoly on the issuance of banks and notes, central banks can exercise a decisive influence on short-term money market interest rates—and, by extension, on foreign exchange rates. The credibility of a central bank depends not only on the technical expertise of its management but also, crucially, on whether it has operational independence from the government. An important feature of central banks in recent years is the (somewhat informal) network of mutual currency swap agreements that allow participants to draw on a credit line from another central bank in a different currency than its own. These networks play an important role in stabilising global FX markets in times of heightened currency volatility. Currency swap agreements are mostly centered around the United States’s Federal Reserve Bank and the European Central Banks, but they also involve —increasingly— the People’s Republic Bank of China.

A central counterparty clearing house is defined by the Bank for International Settlements as an entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts. Unlike currency forward markets, which are fairly unregulated or ‘Over-the-Counter’, currency futures markets depend on an exchange that acts as a central counterparty clearing house to guarantee all trades. This is done in order to attract retail participation in markets and thereby increase liquidity, as no mutual credit checks amongst traders are required. Participants, however, are required to make an initial good-faith deposit on every single position.

Centralised Treasury is the system of financial management used by international companies with subsidiaries, in which funding activities, investment and foreign exchange decisions are made not by local treasurers but by one centrally located treasury team. Supporters argue that centralised treasury operations enhance cash-flow visibility, optimises liquidity across the organisations, increases efficiency by reducing redundancies, and allows for more effective risk management. From a foreign exchange risk management perspective, the main argument in favour of centralised treasury is that it enhances exposure netting possibilities, thereby allowing the firm to avoid unnecessary hedging. Detractors of centralised treasury argue that it results in the loss of valuable local knowledge that only local treasurers can take advantage of.

Clearing (the clearing of payments) is the process by which an intermediary entity acts to ensure a transaction is carried out, from the initial agreement between the two counterparties to the actual transfer of money from one bank account to another. The intermediary entity effectively adopts the role of both counterparties to carry out the transaction.In currency transactions, a bank, broker or FX provider completes the clearing process through a clearing department. Clearing speeds up the transactional delay between parties. Counterparties make payments directly to the clearing entity rather than the counterparty at the opposite end of the transaction.International clearing houses include: Clearing House Automated Payment System (CHAPS) in the UK, EBA Clearing in the Eurozone and Automated Clearing House in the United States.