Glossary

Under Hedge Accounting, a fair value hedge is a hedge of the exposure to changes in the fair value of a recognized asset or liability or unrecognized firm commitment, attributable to a particular risk and could affect profit or loss. (The other main type of hedge is the Cash Flow hedge).

Fedwire is the abbreviation for the United State’s Federal Reserve Wire Network, a real-time gross settlement funds transfer system that settles funds electronically between any of the United States banks registered in the Federal Reserve System. Each transaction is processed individually and settled upon receipt via a highly secure electronic network. Settlement of funds is immediate, final and irrevocable.

The Financial Conduct Authority (FCA) is a United Kingdom regulatory body that focuses on the regulation of financial services firms (retail and wholesale). It is funded by membership fees it charges and is completely independent of the United Kingdom government.The FCA has a crucial role in maintaining the integrity of financial markets in the UK and regulating the conduct of firms that supply financial services.The FCA was preceded by the Financial Services Authority (FSA), which was abolished following the enactment of the Financial Services Act 2012. The Financial Services Act 2012 introduced a regulatory framework involving the FCA, the Bank of England Financial Policy Committee and the Prudential Regulation Authority.Under the FCA's remit, its powers include:- The power to investigate organisations or individuals;- The power to ban financial products or services for up to a year while considering a permanent ban;- A supervisory role with banks and authorised payments institutions to ensure customer treatment is fair, to oversee healthy competition and to spot financial risks early in order to mitigate the chance of systemic damage.In an attempt to encourage innovation in the financial sector, in 2014 the FCA launched FCA Innovate, an initiative aiming to support the development of innovative products and services that improve customers' access to finance. This initiative was crucial for the development of UK Fintech companies.

Financial statement translation is the process through which a firm restates, —in the currency in which a company presents its financial statements—, all assets, liabilities, revenues, expenses, gains and losses that are denominated in foreign currencies. This process of financial statement translation results in accounting FX gains and losses. There are three main financial statement translation methods available. With the current/noncurrent method, all the foreign exchange denominated current assets and liabilities are translated at the current exchange rate, while non-current assets and liabilities are translated at the historical exchange rate. With the monetary/nonmonetary method, monetary items such as cash, accounts receivable and payable, are translated at the current exchange rate, while nonmonetary items (inventory, fixed assets) are translated at the historical exchange rate. Finally, with the current rate method, all balance sheet and income statement items are translated at the current exchange rate. No matter what financial statement method is used, the resulting FX gains and losses are paper only, and rarely affect cash flows.

The term Fintech, made up of ‘finance’ and ‘technology’, describes innovative companies in the financial services industry that rely on software-based solutions to deliver their products. Fintech firms are active in a wide array of B2C and B2B markets: payments, insurance, loans, cryptocurrencies, asset management, equity, FX and commodities. Risk management is an area of increasing importance. Fintech players are creating an entirely new field as they deploy cloud-based applications to help companies manage financial risk. One example is Currency Automation Management. Fintechs in this space provide businesses with end-to-end FX automated hedging programs that can be tailored to the specific needs of each company in terms of pricing dynamics, degree of forecast accuracy and forward points situation.

Fintech companies provide financial services using technological innovation. The rise of Fintech was made possible by the convergence of technological development and changes in financial regulation.Fintech companies essentially offer alternatives to traditional banking in services such as equity funding, lending, payments and foreign currency trading. What sets these new companies apart is their use of technologically sophisticated methods and an approach focused on the client, rather than on short-term profit.With that philosophy, the Fintech industry is challenging the traditional finance sector, which has long been dominated by banks, followed by brokers, wealth management firms, asset portfolio management firms and financial advisors.

A fixed exchange rate is a policy that consists in pegging a country’s currency to USD or EUR. By removing the danger of wild currency fluctuations, fixed exchange rates can be a valuable tool in the arsenal of a country that seeks to stabilise its inflation rate. However, sooner or later the fundamentals are likely to shift in one direction or another, and the currency peg becomes more and more difficult to sustain. For this reason, most fixed exchange rate regimes are temporary arrangements

A flexible forward contract, also known as an open forward contract, is a contractual agreement to buy or sell a specified amount of one currency against payment in another currency on or before a specified date in the future known as 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 ‘fixed’, ‘closed’ or ‘standard’. In a flexible forward contract, the funds can be exchanged in one go (“outright”). Alternatively, several payments may be made over the course of the contract provided that the entire amount is settled by the maturity date. For example, a US company knows it will have to pay a number of invoices from a supplier based in the Eurozone during next year. I can decide to purchase a 12-month open USD-EUR forward contract, allowing it to make drawdowns to pay the supplier in euros, as and when necessary, over the course of the year.

A flexible hedging strategy or program is the hedging of future FX-denominated cash flows that result from contractually binding transactions, whether or not the corresponding receivables/payables have been created. In a flexible hedging program, forwards are booked against SO/POs (sales orders/purchase orders) and/or AR/AP (accounts receivable/accounts payable). Flexible hedging strategies or programs call for constant vigilance, as new orders keep on arriving. Their effective implementation is carried out with the help of Currency Management Automation solutions that provide end-to-end automation. On the opposite side of the spectrum, static hedging —where a big hedge is taken at the start of the period and is not reactivated until this period is over— is implemented once. Flexible hedging strategies or programs are particularly well suited for companies with low forecast accuracy where an FX rate is systematically part of its pricing parameters. Whether their pricing is frequently updated (bed banks in the travel industry) or not (ecommerce companies), these firms are mostly compelled to hedge on a transaction-by-transaction basis.

A floating exchange rate regime lets currencies find their level in the foreign exchange market. Contrary to a fixed exchange rate regime, where a currency is pegged to another at a fixed rate, exchange rates in a floating exchange rate regime are determined by the interplay of supply and demand. The current floating exchange rate regime has been in place since the 1970s. Some governments intervene, through their central banks, to manage the value of their currency relative to others in order to avoid losing competitiveness. China’s exchange rate regime, for example, has undergone gradual reform since the move away from a fixed exchange rate in 2005. The renminbi has become more flexible over time but is still carefully managed, and depth and liquidity in the onshore FX market is relatively low compared to other countries with floating exchange rates. Gradually, China is allowing a greater role for market forces within the existing regime, and greater two-way flexibility of the exchange rate.

Foreign currency measurement is the accounting method used by an organisation to measure foreign transactions in their functional currency.International businesses that pay suppliers in foreign currencies and/or sell their products in overseas markets need to translate those costs and revenues into their functional currency in their financial statements.Since currencies fluctuate continuously, these companies are subject to transaction risks. The variations of the exchange rate in the different moments when foreign currencies are exchanged, generate differences in the amount of functional currency needed to pay suppliers (in the case of costs) or received from sales in overseas markets. These differentials are called transaction gains and losses and are included in the company's net income statements.