Glossary

A Key Risk Indicator or KRI is a measure used in management to assess the degree of risk involved in the different areas of activity of an organisation. KRIs work as indicators of events that might have harmful effects on a company or its activity. KRIs are typically measurable, i.e., they can be quantified in terms of percentages, numbers etc. They are predictable and are often used as early warning signals, while also tracking trends over a period of time. In a certain sense, KRIs could be understood as the antithesis of Key Performance Indicators (KPIs). While KPIs show how well a company is doing, KRIs are designed to warn management about potential sources of risk.

A knock-in forward is a derivative that offers buyers a more attractive rate than a regular forward and includes a condition that the exchange rate must hit a defined knock-in level during the contract. If the “Knock-in level” is not reached, the transaction will not be made on the maturity date.Due to their complex character, knock-in 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.A Knock-In Forward includes the following elements:Financial Asset: EUR/USDPosition at Maturity: EUR/USD shortAmount: 1,000,000Spot Rate: 0.9350Forward Rate: 0.9275Knock-in Forward Rate: 0.9150Knock-in Level: 0.9050Tenor: 6 monthsDespite the name ‘forward’, this mechanism is more akin to a speculative options contract*. The buyer aims to secure a more convenient rate than a regular forward but risks “losing” the contract. If the knock-in rate is not attained, the contract will be cancelled and their business will not be protected against currency volatility.

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/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 monthsKnock 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.