Glossary

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Account Structure The organisation of accounts within the group, in terms of type of accounts, currencies, ownership, and location.

ACH (Automated Clearinghouse) Electronic network for financial transactions, generally riding on the real-time gross settlement (RTGS) network and coordinated by the central bank, that process large volumes of credit and debit transactions in batches.

ACH Credit Transaction An automated clearinghouse transaction that sends funds from a payer’s (originator’s) account to a beneficiary account.

ACH Debit Transaction An automated clearinghouse transaction that pulls funds to the beneficiary (originator)’s account from the payer’s account.

Acquirer or Card Acquiring Bank The bank that buys credit card transactions with recourse from a merchant and will pay the merchant and settle the transaction with the card issuing bank (the merchant’s bank).

Advising Bank The bank that advises the beneficiary (exporter or seller) of a letter of credit (LC) opened in its favour.

Alpha Measure of performance on a risk-adjusted risk.

ANI (Adjusted Net Income) Method Method of cash budgeting in which cash flow is determined indirectly by adjusting the net income on cash.

AP (Accounts Payable) The amount that a company owes its trade creditors.

AR (Accounts Receivable) Assets resulting from the extension of trade credit to a company’s customers.

Arbitrage The process of purchasing an asset or security and simultaneously selling it in another market through direct or indirect means, which leads to profit without market risk.

ARM (Accrual Reversal) Method Method of medium- to long-term indirect cash forecasting that uses reversal of accruals to forecast cash flows.

At-the-Money Forward An option strike price that is the same as the at-the-money forward price.

Back Office The unit, independent of dealers, that executes treasury and financial transactions that could include administration, record keeping, settlements, and accounting.

Back-Testing A process of testing of a risk management strategy through testing with historic numbers and performance.

Back Value Date A process where a bank reflects an accounting entry to a customer’s account or an internal account on a date prior to the actual fund flow.

Bank Draft A negotiable instrument drawn by a bank on itself that is purchased by the payee’s bank and sent back to the paying bank for reimbursement.

Base Currency The domestic or reporting currency of a company; also the first currency (commodity) in a currency pair.

Base Rate A generally accepted and published interest rate or benchmark over which a credit spread is applied, such as the Fed funds rate, the prime rate, or the London Interbank Offered Rate (LIBOR) on which a rate of interest is based.

Basis Point One-hundredth of a percentage point (.0001 or 0.01%).

Basis Risk The risk associated with hedging or assuming a position in a benchmark or terms that is not directly the exposure that is being hedged.

Basket Option A financial option where the underlying asset is a group of commodities, securities, or currencies.

Benchmark A published rate or index that is used to fix prices of financial transactions or measure performance and risk.

Benchmark Yield Curve The yield curve for a set of benchmarks, such as government securities.

Beta A measure of volatility of a security to the market, used in the capital asset pricing method (CAPM), which calculates the expected return of an asset and market return.

Bid Rate The price at which the quoting bank or market maker will buy or borrow the asset, commodity or market factor for which the price is being quoted.

Bid–Offer Spread The difference (spread) between the bid rate and the offer rate quoted by a market maker.

Bill of Exchange A written order from a drawer of the bill to a drawee, to pay a specified sum on demand or at particular point in time, used to finance trade transactions and to obtain credit when discounted by a bank.

Black-Scholes Model The pathbreaking model used as the basis for option pricing.

Buy Backs Repurchases of outstanding shares by a company to reduce the number of shares in a market.

Call Option The right to buy a specific amount of a commodity at a specific price at a specific time.

Callability The ability of a borrower to pay back the monies owed and reduce its indebtedness prior to a maturity date.

Calling Bank The bank that calls or asks for a price from the quoting bank or market maker.

Capital Asset Pricing Model (CAPM) A model for valuation that describes the relationship between risk and expected return and is used in the pricing of securities.

Capital Structure The proportion or structure of debt, equity, and a hybrid of the two in a firm’s capital base.

Cash Concentration The movement of funds from outside locations to a central account for efficient utilisation.

Cash Forecasting The activity of estimating cash inflows and outflows and hence liquidity in the short and long term.

Cash Flow Hedge Hedging activity that is targeted at reducing the variability of cash flows across various currencies.

Cash Flows at Risk A measure with a certain degree of certainty of a company’s potential inability to meet payments or obligations.

Cash Pooling The process to combine the liquidity across a group to lower volatility and increase efficiency of cash utilisation with potential cost savings and lower borrowing.

Cash Terms Credit terms in a trade transaction in which the buyer has a short period (a few days) to make the payment.

CCC (Cash Conversion Cycle) A measure in number of days that provides an indication of how soon the company churns its cash and the general measure of the period for which it requires external sources to fund its daily operations. It can be computed by the formula CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding.

Centralisation The relocation of activities and oversight to one location from different geographic and subsidiary locations. Centralisation can be of many aspects, including people, processes, systems, activities, and accounts.

Cheque Truncation The process by which key information on a paper cheque is captured electronically for further distribution and processing.

Clearing Float The time delay between the deposit of a cheque and the debit in the payer’s account.

Clearing The transmission, reconciliation, and confirmation of payments or securities before settlement. This could include netting of instructions and determination of final settlement amounts.

Clearinghouse An association or institution that facilitates the exchange of payments and settlements of funds and/or securities in a geographic area. In many cases, it also takes on counterparty risk for the transactions.

Collecting Bank The remitting bank’s correspondent bank in a documentary collection transaction. The collecting bank collects the amount from the buyer and releases the relevant documents.

Collection Float The time gap between the dispatch of the cheque and the credit to the payee’s account.

Commercial Paper (CP) Unsecured short-term corporate debt in the form of promissory notes, generally used to fund working capital or other short-term needs.

Commodity Risk Uncertainty of firm value and financials caused by changes in the prices of commodities.

Confirmation Written acknowledgement exchanged between two counterparties to a transaction with all terms and conditions.

Confirming Bank The bank that adds its confirmation to a letter of credit transaction, increasing its creditworthiness by committing to the beneficiary (and its bank) that payment will be made irrespective of the issuing bank’s ability to pay, provided all other conditions are met.

Controlled Disbursement A bank-provided payment service that provides almost immediate notification of cheque amounts cleared that day.

Convertibility The ability to convert money from one form (currency) to another; usually regulated by the regulator of that country (see Exchange Control).

Correlation The high degree of relationship in the moves of two market factors. A correlation of 100%, or 1, means that the two move completely in tandem, while a correlation of −100%, or −1, means that they have an inverse relationship.

Correspondent Bank A bank that provides its client banks (those that hold accounts with it) in different locations with payment and other services.

Counterparty Risk The uncertainty that a counterparty that needs to deliver assets or money will fail to fulfil its financial obligations through a lack of either ability or intention to pay.

Coupon Swap An exchange of interest cash flows on a prespecified notional amount where the two legs are in different currencies.

Credit Default Swap (CDS) An agreement between two parties where one party agrees to assume ownership for an underlying debt asset and pay the other party the original value of the asset in the event that the obligor of the debt asset defaults, in exchange for a premium (called CDS spread).

Credit Exposure The total amount of credit or obligation extended to a borrower.

Credit Rating An assessment of creditworthiness of individuals, companies, or countries.

Credit Rating Agency An entity that assigns credit ratings for issuers of debt obligations and debt instruments themselves.

Credit Spreads The difference between a benchmark (such as a treasury security) and the rate at which an obligor can borrow.

Cross-Currency Swap An agreement between two parties to exchange the interest payments and principal amounts on prespecified notional amounts in different currencies.

Cross-Border Risk The uncertainty of payments owed from an entity in another country to be made because of changes in exchange regulations in that country.

Daylight Overdraft (DLOD) or Intraday Credit A credit limit extended by a bank to a counterparty for regularisation or payback before the end of that business day; usually used for payment and settlement purposes.

Debt/Equity Ratio The ratio of a company’s debt to its equity capital, which provides an absolute and relative measure of the degree of a firm’s indebtedness.

Defeasance The ability to reduce or liquidate assumed risk.

Delta The change in the price of an option caused by the change in the price of the underlying market factor spot price.

Demand Deposit Accounts (DDAs) A bank account that gives the owner the ability to transfer funds to a third party via a cheque.

Direct Debit A preauthorised debit through the clearing system initiated by the payee.

Disbursement Float The time between the dispatch of a cheque and the debit to the payer’s account.

Distribution Method A forecasting technique used in cash scheduling wherein the distribution of cash flow over a given period is estimated.

Documentary Collection An international payment method involving the collection of a draft and accompanying documents through correspondent banks across countries.

Derivatives A transaction between two parties where the exchange of cash flows or payments is derived from the price movement of one or more market factors.

DIO (Days Inventory Outstanding) A measure of the longevity of the inventory on the balance sheet, expressed by the value of inventory as a percentage of the cost of goods sold projected as a number of days.

Diversification A risk management technique that distributes the risk across a set of market factors.

DPO (Daily Payables Outstanding) A measure of the longevity of the payables on the balance sheet, expressed by the value of accounts payable as a percentage of the cost of goods sold projected as a number of days.

Draft A written order to pay a party (payee or bearer), from a drawer to a drawee bearer, a specified sum either on demand (sight draft) or at a specified point in time (usance).

DSO (Days Sales Outstanding) A measure of the average number of days that a company takes to collect revenue after a sale has been made, expressed by the value of accounts receivable as a percentage of sales projected as a number of days.

Economic Capital The amount of capital that a firm should have to support any risks that it assumes.

Economic Exposure An exposure that changes the economic returns and financials of a company over a period of time. It is different from accounting exposure, which is the accounting impact at any point of time of the risk elements.

Electronic Data Interchange (EDI) The electronic exchange of business data between or within commercial entities (including their agents or intermediaries, in some cases also public administrations) in a standard format, for transactions such as orders, invoices, remittance advices, and payments.

Electronic Lockbox A service provided by a vendor that includes recording receipt, compilation, processing and electronic transmission of incoming payments across different payment methods.

End-of-Day Gross Settlement System A system for funds transfer where payment orders are received throughout the business day but the final aggregated settlement takes place at the end of the day on a gross basis.

Equity Risk Uncertainty to the financials of the firm caused by a change in equity prices, usually related to investments or capital.

Exchange Control Regulatory restrictions on the conversion of currency in that country to a foreign one, typically for the current account (trade and related transactions) or the capital account (debt, equity, and related transactions); usually administered by the central bank of each country.

eXtensible Markup Language (XML) A standard data format used for efficient exchange of data between different applications.

Factoring A financing transaction where receivables are sold to a third party at a discount in return for assumption of risk.

Fixed or Pegged Currency A currency whose exchange rate is established in terms of another currency and does not change when traded in the interbank market.

Float Nonavailability of funds for use owing to internal or external inefficiencies.

Floating Currency A currency whose exchange rate is determined by the foreign exchange market through demand and supply and trading.

Foreign Exchange Settlement Risk The risk that one party to a foreign exchange transaction will pay the currency it sold but not receive the currency it bought owing to regulatory or credit events related to the defaulting party.

Forfaiting Purchasing of a specific receivable from a seller by an agency called a forfeiter.

Forwards An over-the-counter (OTC) transaction for a prespecified amount at a specified price on a specified date more than two working days from the current date.

Front Office The part of treasury that initiates transactions with other counterparties.

Funding Liquidity Risks The inability of a company to meet its funding requirements.

Futures Generally a standardised exchange-traded transaction for the sale and purchase of a standard amount of a market factor or asset at a predetermined future date and price.

FX Risk Change in the value of a firm owing to a change in foreign exchange (FX) rates.

Garman-Kohlagen Model An extension or derivation of the Black-Scholes model that helps to price foreign exchange options.

Hedge Accounting The accounting treatment adopted by companies that allows them to enter into genuine hedge transactions and reduce volatility on the profit and loss statement.

IMAGE© Methodology An advanced but simple five-step risk management methodology (copyright of Aktrea Capital); the steps are risk identification, measurement, accounting, governance, and evaluation of the risk management process.

Implied Volatility Traded volatility as a percentage used to price options.

Interest Rate Risk Uncertainty to a company’s financials caused by changes in interest rates.

Interest Rate Swap An exchange of interest cash flows in the same currency.

ISDA (International Swap Dealers Association) A trade organisation of market participants that provides governance guidelines for market-related transactions.

Letter of Credit (L/C) A trade-related document issued by a bank to a seller as a commitment to make a trade payment on behalf of a buyer (its customer) as long as specified conditions are met.

Lockbox A collection system in which a vendor collects or receives, processes, and deposits a company’s cheque receipts.

Long Position Buying an asset or creating a positive position in a market factor.

Market Factor A particular asset, such as a specific equity, bond, or commodity, or item of an asset class, such as a currency pair or interest rate benchmark.

Market Factor Risk The change in the financials of a company caused by a shift in a specific market factor.

Market Liquidity Risks The risk of not being able to sell off a position or an asset owing to an absence of buyers.

Mark-to-Market (MTM) The current fair value of an asset, liability, portfolio, transaction, or position based on the current market price of all market factors that comprise the fair value.

Mark-to-Market (MTM) Accounting Refers to the accounting practice where changes to the fair value of an asset or liability directly impact the profits and losses based on the current market price of the asset or liability.

Mark-to-Market (MTM) Value The current market value of a contact, derivative, position, or portfolio.

Master Agreement The flagship agreement issued by the International Swap Dealers Association that serves as the bulwark of over-the-counter transactions between two counterparties.

Mezzanine Financing Hybrid capital that has qualities of both debt and equity, which provides the lender with the rights to convert an ownership or equity interest in the company if a loan is not paid back in time.

Middle Office A department that is independent of, and sits in between, the front and back offices, and is responsible for control, valuation, and review activities.

Multi-Currency Notional Pooling A pooling process that involves multiple currencies, but the money does not physically get pooled. Instead, the pooling agent (bank) provides the net effective interest payable or receivable centrally.

Multilateral Netting A netting payment arrangement among three or more parties.

Net Settlement The settlement of obligations between counterparties on a net basis.

Netting The process of settling outstanding payments between a set of parties through a single consolidated net payment from a central entity called a netting centre.

Nostro Account An account (usually in a foreign currency) of a bank with another (usually foreign) bank in the country of the currency.

Notional Amount A predetermined amount on which payments for swaps or other derivative transactions are based.

Offer Rate The price at which the quoting bank or market maker will sell or lend the asset, commodity, or market factor for which the price is being quoted.

Open Account A trade transaction in which the seller issues an invoice that is formal evidence of an obligation and dispatches the goods to the buyer.

Operational Risk Uncertainty regarding the company’s performance owing to lapses in processes, control, and execution.

Option A contract that gives the buyer the right to sell or buy a commodity, asset, or market factor at a future date at a future price.

Payment Float The time between the receipt of an invoice and the debit to the payer’s account.

PBS Method (Pro Forma Balance Sheet Method) A cash forecasting method used for medium- to long-term forecasts.

Pooling See Cash Pooling.

Positive Pay A cash management service provided by banks where only those cheques with numbers, beneficiary details, and amounts (as provided by the customer) are honoured, to try to reduce the instances of cheque fraud.

Principal-Only Swap An exchange of cash flows (principal on capital or debt transactions) in which principal amounts in different currencies are exchanged.

Processing Float The time between the receipt of the cheque by the payee and the deposit.

Put Option An option contract giving the owner the right but not the obligation to sell an asset at a specified price within a specified time.

Puttability The ability of a lender to force the borrower to repay before scheduled maturity.

Quanto Swap An exchange of interest cash flows in which one leg is denominated in one currency but settled with the benchmark of another currency.

Quoting Bank The market maker or the bank in an over-the-counter transaction that receives the request for a price.

Real-Time Gross Settlement (RTGS) System A settlement system in which processing and settlement take place in real time and on a gross basis without netting off the payments.

Receipts and Disbursements (R&D) Method A simple method for very short-term cash forecasting that uses schedules of cash receipts and cash disbursements.

Receivables Financing Asset-financing arrangements in which a company sells its receivables from customers to receive discounted cash payments up front, with or without recourse to itself in case the customer eventually does not pay.

Re-invoicing A process by which a group company acts as an intermediary between a manufacturing subsidiary in one country and the sales subsidiary in another country, in order to make use of tax and other regulations and create a positive financial impact for the company.

Repricing or Rollover Risks The uncertainty associated with the renewal of a debt or an investment on maturity and the possible prevalent interest rates at the time of the maturity of the existing item.

RFI (Request for Information) A business process whose purpose is to collect written information about the capabilities of various suppliers or service providers.

RFP (Request for Proposal) A business process where the customer issues an invitation to vendors or service providers to bid or send a proposal for an activity, service, or product.

Risk Engine A computer-based model, such as Aktrea’s ARTEMIS, that provides various risk scenarios and simulations to assist in intelligent decision making regarding risk management.

Scenario Analysis An assessment of the financials of the company across various scenarios that impact markets and the business environment.

Securitisation A financing transaction in which assets are pooled and securities representing different interests and risks in the pool are issued to investors in exchange for cash up front.

Sensitivity Analysis The analysis of the degree of dependence of the company’s financials on market factors.

Settlement A business process where funds, securities, or interest in securities are delivered to fulfill obligations.

Short Position A position where a party has a net negative or sold position in an asset or market factor.

Smart Cards Cards with inbuilt technology or intelligence through chips that can store monetary value and can be electronically replenished.

Spot Transaction A price for settlement typically two business days from the date of the transaction.

SSC (Shared Service Centre) A common entity of many or all functions of a global company or companies of a global group responsible for the execution and handling of specific operational tasks of payments and collections of the company or group. These are typically high-volume, repetitive, and relatively low-value-added tasks.

STP (Straight-Through Processing) Payment transactions that move end to end without manual intervention.

Stress Testing Scenario analysis in extreme conditions; used to determine the ability of a given entity to withstand dramatic deterioration of a market or environment.

Strike Price The price at which a holder can buy or sell an option.

Swaption An option that gives the owner the right to enter into an underlying swap.

Target Balance A balance that is ‘targeted’ to be maintained at the end of each day.

TMS (Treasury Management System) A system that helps in managing the Treasury function and interfaces with the general ledger (GL) or enterprise resource planning (ERP) system of the company and banking systems.

Transactional Exposure The risk that a company is exposed to (usually foreign exchange) owing to specific transactions, such as purchases or sales in different currencies or investments or obligations in another currency.

Transferability The regulatory ability for a buyer in a country to remit the payable money to the seller in another country.

Translational Exposure The uncertainty to a group’s balance sheet (investments, debt, other assets and liabilities) owing to change in (usually foreign exchange) rates.

Trapped Cash Cash in a subsidiary in another country that can be brought back only with severe tax and other negative financial implications, or cannot be brought back at all owing to exchange control regulations; this is typically liquidity that is trapped and cannot be used elsewhere in the group.

Treasury Culture A work and participation ethic and environment within Treasury that enables an atmosphere of knowledge and positive teamwork to ensure the highest work and motivational standards.

Treasury Design The activity of creating the right processes, structures, and approaches at the right place with the right infrastructure and the right people.

Treasury Fitness The degree of efficient functioning of a corporate treasury, akin to a fitness test for the human body, determined by assessing the treasury to identify potential pain points with the end objective of addressing these pain points and preventing any potential significant breakdown.

Treasury Leadership The ability of Treasury to positively influence the performance of the firm and drive the organisation towards industry and segment leadership; creates an environment that fosters excellence of capital building, execution, and support across all aspects of Treasury, and works with the business to produce outstanding performance.

Underlying The basic asset, liability, cash flow, or other component of a firm’s financials whose risk or variance is being managed.

Unwinding Positions Exiting or liquidating a position, transaction, derivative, or asset at a profit or loss.

Value-at-Risk (VaR) An estimate with some degree of confidence on the losses to a portfolio or financials based on statistical analysis and assumptions.

Vanilla Option A simple stand-alone put or call option.

Volatility The variability of a market factor measured as a percentage; usually denoted as historic (based on past prices) or implied (traders’ or market estimate over a tenor).

WACC (Weighted Average Cost of Capital) Calculation of a firm’s cost of capital as a proportion of its capital structure (percentage of different kinds of debt and equity); the lower the WACC, the more efficient the company’s capitalisation.

Working Capital Effectively the amount of external capital that a company needs to run its operations on a day-to-day basis.

Yield The percentage gain (usually annualised) that an investor derives from a financial asset.

Yield Curve A graph of current interest rates (government bond yields, AAA benchmarks, swap or forward rates) on the y-axis with the corresponding tenor of investment on the x-axis, depicts the current position of the market on the interest rates over time horizons.

Yield Curve Risk Uncertainty to the financials of a company owing to shifts or changes to the shape of the prevalent yield curve to which the company is exposed.

Zero-Balance Account (ZBA) A bank account whose debits or credits are swept at the end of each day to a zero balance; part of a physical pooling arrangement.

Zero-Premium Option An option structure that is a combination of bought and sold options to achieve a particular payoff, where the sum of premiums payable by one leg of options (sold by the first party to the second) is the same as the sum of the premiums payable by the other leg (bought by the first party from the second).