Glossary

A foreign exchange FX swap is an exchange of debt-service obligations denominated in one currency for the service on an agreed-upon principal amount of debt denominated in another currency. By swapping their future cash-flow obligations, the counterparties are able to replace cash flows denominated in on currency with cash flows in a more desired currency. A company borrowing in GBP at a fixed interest rate can convert its debt into a fully hedged USD liability by exchanging flows with another company with the opposite need. At each payment date, the company will pay a fixed interest rate in USD and receive a fixed rate in GBP. Unlike interest rate swaps, where no exchange of principal takes place, foreign exchange FX swaps include the exchange of principal amounts at the start and at the end of the agreement. Depending on the nature of the corresponding interest rate payments —at a fixed or floating interest rate—, currency swaps can be arranged as ‘fixed-for-fixed’, ‘fixed-for-floating’ or ‘floating-for-floating’.

A forex trading platform is a portal or software interface that allows customers to trade currencies with execution in all major FX instruments, including spot, forwards, NDFs, limit orders, options and swaps. Forex trading platforms provide liquidity through a single dealer (single dealer platform) or multiple dealers (multi-dealer platforms). Forex trading platforms advertise their capacity in terms of displaying transparent pricing, complying with best price execution requirements and providing trade history. Leading forex trading platforms targeting corporate clients offer seamless integration to Treasury Management Systems (TMS) with Straight-Through Processing (STP). Currency Management Automation solutions integrate forex trading platforms, providing connectivity between the ERP/TMS and forex trading platforms in order to automate FX hedging and distribute risks among multiple banks.

A forward contract, in the context of foreign exchange, is a contractual agreement to buy or sell a specified amount of one currency against payment in another currency at a fixed future date, known as the value date.The exchange rate is fixed at the time the contract is entered into. A forward contract effectively ‘locks in’ today’s exchange rate, plus or minus the forward points, i.e. the difference between the forward and the spot rate due to interest rate differentials between currencies. An open forward contract, the funds can be exchanged before 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’.

A forward contract opportunity profit exists when the value of a long (short) forward position increases (decreases) prior to contract expiration, reflecting a shift in the underlying spot exchange rate. A speculator might take the opportunity profit and close out the position. However, closing out a forward position taken as a hedge would leave the underlying exposure unprotected. When forward points are not favourable and the firm tolerates some degree of deviation between the budget rate and the spot rate at the time of setting the budget, the budget can be hedged with conditional orders—’take-profit’ if currency markets move in the firm’s favour, and ‘stop-loss’ if markets move against. This program allows the firm to protect a ‘worst-case scenario’ budget rate while delaying hedging as much as possible and still allowing it to profit from possible favourable market moves.

The forward element is a concept introduced by the IFRS 9 standards for general hedge accounting and defines the forward points of a forward contract, to distinguish it from the spot element of the contract. Forward points are the basis points added to or deducted from the current spot rate to determine the forward rate at which the forward contract will be settled on the delivery date. These forward points result from the difference between the interest rates of the two currencies and the duration of the contract. One of the changes under IFRS 9 is the possibility of excluding it from the designation of a forward contract as the hedging instrument and accounting for it as costs of hedging.Under IFRS 9, companies can store the forward element in other comprehensive income (OCI). Changes in the fair value of the forward points, thus, will not affect the profit and loss, thereby increasing the effectiveness of the hedging relationship and mitigating income statement volatility.

A forward exchange rate is the agreed-upon price at which two parties commit to exchanging one currency for another on a specified future date.

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How Forward Exchange Rates Work

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Unlike the spot exchange rate, which applies to currency transactions executed for immediate delivery, a forward exchange rate allows businesses to fix a guaranteed conversion rate today for a settlement that occurs weeks, months, or years ahead.

Contrary to a common misconception, the forward exchange rate is not a prediction of where the spot market will trade in the future. Instead, it is calculated using the current spot rate adjusted for the interest rate differential between the two currencies over the agreement's maturity period. This adjustment is referred to as the forward points (or a forward premium or discount).

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The Calculation Formula

Forward Rate = Spot Rate × [(1 + (r_quote × t)) / (1 + (r_base × t))]

Where:

• r_quote = Short-term interest rate of the quote currency
• r_base = Short-term interest rate of the base currency
• t = Time to maturity (expressed as a fraction of a year)

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Understanding Premiums and Discounts

• Forward Premium: Occurs when the foreign currency's interest rate is lower than the domestic interest rate, resulting in a forward rate higher than the spot rate.
• Forward Discount: Occurs when the foreign currency's interest rate is higher than the domestic interest rate, resulting in a forward rate lower than the spot rate.

By locking in this rate via a forward contract, corporate finance teams eliminate the variable of currency volatility between the trade date and the settlement date.

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Why Forward Exchange Rates Matter to Corporates

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For CFOs and corporate treasurers managing foreign currency receivables or payables, unpredictable spot exchange rate movements present a direct threat to profit margins. Operating without fixed rates leaves budget targets vulnerable to market swings.

Utilising forward exchange rates offers key strategic advantages:

• Budget Certainty: Enables finance teams to establish fixed commercial prices and protect cash flow targets.‍
• Margin Protection: Ensures that the profit margin agreed upon at the time of a commercial sale or procurement contract is preserved at execution.‍
• Financial Forecasting: Provides precise, predictable figures for treasury planning and financial reporting.

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How Kantox Automates Forward Exchange Rates

While forward contracts effectively mitigate market risk, manually monitoring market rates, calculating points, and placing forward trades across multiple currency pairs creates heavy operational overhead.

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Kantox simplifies this process by integrating automated currency management directly into your ERP or treasury systems. Through software like Kantox Dynamic Hedging®, businesses can automatically capture exposure, compute forward exchange rates in real time, and execute micro-hedges instantly as sales or purchase orders are generated. This automated workflow removes manual execution friction while maintaining strict policy compliance.

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To see how automated forward rates can protect your margins, explore Kantox Dynamic Hedging®.

Forward points (or swap points) are the number of basis points added to or subtracted from the spot exchange rate to calculate the forward exchange rate between two currencies, reflecting the interest rate differential between the respective countries.

How are forward points calculated?

Forward points are not a fee, commission, or hidden cost charged by foreign exchange markets. Instead, they represent a financial adjustment derived from the principle of covered interest rate parity. They are determined by the interbank interest rate differential between the base currency and the quote currency for a specific maturity period.

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• Forward premium (report): Occurs when forward points are added to the spot rate because the quote currency offers a higher interest rate than the base currency.‍
• Forward discount (deport): Occurs when forward points are subtracted from the spot rate because the base currency's interest rate is higher than that of the quote currency.

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Why are forward points critical for corporate treasury?

For CFOs and Group Treasurers operating under European and UK financial reporting standards (IFRS 9 and UK GAAP), forward points directly influence risk management strategies and profit and loss (P&L) statements:

• Hedging cost or yield: They define the implicit cost (or yield) of securing a future exchange rate through an FX forward contract.‍
• Budget planning: They impact the final budget exchange rate applied to commercial import and export contracts executed over time.‍
• Hedge accounting under IFRS 9: Under IFRS 9, fair value changes in forward points can be separated from the spot element and accounted for as a "cost of hedging" in Other Comprehensive Income (OCI), reducing P&L volatility.

Automating forward points management with Kantox

Manually tracking and optimizing interest rate differentials across multiple currency pairs creates inefficiency and execution drag. Interbank market volatility demands real-time execution visibility to manage trading costs effectively.

The Kantox Dynamic Hedging® software solution automates forward contract execution, capturing forward points at the optimal moment to systematically protect profit margins from FX volatility. Additionally, the Hedge Accounting Module streamlines compliance under IFRS 9 and UK GAAP, isolating and managing forward swap point costs directly within your financial reporting workflow.

The forward point premium is the additional value of a given currency against another, when the forward and spot rates are compared. For example, if spot JPY-USD is 0.009189 and the corresponding 180-day forward rate is 0.009360, JPY trades at a 171-point premium. The forward premium can also be calculated in percentage terms. In this case, the annualised 180-day JPY premium is 3.72% = [(9360-9189)/9189] x 360/180. The forward premium reflects the interest rate differential between USD and JPY. In this example, short-term interest rates are lower in JPY than in USD, which explains the forward premium of JPY. The forward rate makes it impossible for arbitrageurs to take advantage of interest rates differentials without risk.

A full convertible currency is the monetary unit of a country where holders of the currency have the right to convert it freely at the going exchange rate into any other currency. A currency is deemed to be fully convertible if it fulfills the following three criteria: 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. A fully convertible currency is the monetary unit of a country where holders of the currency have the right to convert it freely at the going exchange rate into any other currency. A currency is said to be fully convertible if it fulfills one or more of the following three criteria about usability, exchangeability and market value: 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.

The functional currency is the currency of the primary economic environment in which a company operates. It is the currency in which a company primarily generates and expends its cash. In most cases, the functional currency is also the firm’s ‘accounting currency’ or ‘reporting currency’, i.e. the monetary unit used by a firm to record its transactions and to present its financial statements. A company can decide to present its financial statements in a currency different from its functional currency, for example when preparing a consolidated report for its parent in a foreign country. While a company can choose its accounting currency, it cannot change its functional currency.

FX or ‘foreign exchange’, also known as ‘forex’, is a term used to describe the exchange or trading of one currency to another. The foreign exchange market has no central marketplace: spot and forward market transactions take place in an ‘Over-the-Counter’ market made up of dealers and large commercial and investment banks. Turnover in global FX markets reached $6.6 trillion per day in April 2019, according to data from the Bank for International Settlements (BIS). It is by far the largest financial market in the world. OTC markets are larger and more diversified than ever, owing in part to the rise of electronic and automated trading While trading continues to be dominated by the major currencies, in particular the US dollar and the euro, in FX markets the trading of emerging market currencies is growing faster than that of major currencies. The rise in electronic and automated trading is one of the key features of today’s foreign exchange markets.

A foreign exchange broker is an intermediary who matches the buy and sell orders from its clients to other clients buy and sell orders. They organise trades on behalf of their clients, the traders. This is the main difference with forex dealers, who trade with and against their clients. There are several benefits that an FX broker can bring to its clients. A broker will guarantee that there is trust and creditworthiness between the two trading parties. This means that trades will actually be settled and also there is no need for traders to check every other trader’s creditworthiness to make the exchange. This would be impossible without the broker. A second benefit is that the broker has access to liquidity providers and market makers. These relationships with banks, financial institutions and dealers mean that the broker will get preferential exchange rates that they then pass on to their clients.