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Treasury & risk glossary
If you're not familiar with the jargon of financial markets, derivatives and hedging here is a glossary of commonly used terms. We're always available to help and explain so reach out if needed.
FX risk management
Key terms covering how businesses manage exposure to currency movements, from everyday instruments to structured hedges.
What is an FX forward contract?
An FX forward is a contract to exchange one currency for another at a fixed rate on a set future date, letting businesses lock in exchange rates ahead of a transaction and protect budgets from currency swings. Read more → /risk-management
What is an FX swap?
An FX swap combines an immediate exchange of two currencies with an agreement to reverse that exchange at a future date and rate, commonly used to manage short-term funding and liquidity needs across currencies. Read more → /treasury-management
What is FX exposure?
FX exposure is the risk that currency movements affect a company's financial results. Transaction exposure comes from foreign-currency cash flows like purchases or sales, while translation exposure typically comes from converting overseas subsidiaries' accounts. Read more → /risk-management
What is a TARF (Target Redemption Forward)?
A TARF is a structured FX hedge offering enhanced rates up to a set "target" gain, after which the contract terminates early — often leaving the remaining exposure unhedged at the worst possible time. Read more → Beware the TARF my son
What is hedging?
Hedging is the practice of using financial instruments or strategies to reduce the risk of adverse price movements in currencies, commodities, or interest rates that a business is exposed to. Read more → / Naive no longer
Commodity hedging
Definitions covering how companies protect against volatile raw material and input costs and revenues.
What is commodity hedging?
Commodity hedging uses instruments such as forwards, futures, options or swaps to lock in costs or revenues for raw materials like cocoa, copper, or oil protecting profit margins from volatile market prices. Read more → All that glitters is not gold, and Read more-->/risk-management
What are contango and backwardation?
Contango describes a market where futures prices are higher than the current spot price, while backwardation is the reverse futures priced below spot. Both affect the cost of rolling commodity hedges over time. Read more → The dancing copper thief
What is a budget rate?
A budget rate is the exchange rate or commodity price a company uses for financial planning and forecasting, set in advance to provide certainty for budgeting even if market prices later move. Read more on Budget rate → How to see the future
What's the difference between commodity futures and forwards?
Futures are standardized, exchange-traded contracts to buy or sell a commodity at a set price on a future date, while forwards are customizable, privately negotiated agreements between two parties. Read more → /risk-management
What is price risk?
Price risk is the risk that the market price of a commodity, currency, or financial instrument will move unfavourably, affecting a company's costs, revenues, or the value of its holdings. Read more → /risk-management
Hedging strategy & instruments
The strategies, policies, and instruments that shape how a hedging program is designed and run.
What is a hedge ratio?
The hedge ratio is the proportion of an exposure that's covered by a hedge, expressed as a percentage. Read more → Cliffs or rolling hills, and Read more →/risk-management
What is a natural hedge?
A natural hedge occurs when a company's costs and revenues move together in the same currency or commodity, offsetting each other without needing financial derivatives. Read more → P&G's $1 billion bet against hedging
What is a hedging policy?
A hedging policy is a company's documented set of rules governing how, when, and how much it hedges — covering approved instruments, hedge ratio targets, approval processes, and reporting requirements. Read more → Good fences make good neighbours, and Read more →/risk-management
What is an FX or commodity option?
An option gives the holder the right, but not the obligation, to buy or sell a currency or commodity at a set price by a future date — offering protection while still allowing upside if prices move favourably. Read more → The name's Bond, John Bond
Hedge accounting
The accounting standards and treatments that govern how hedging activity is recognised and reported in.
What is hedge accounting?
Hedge accounting is an accounting treatment that aligns the timing of gains and losses on a hedging instrument with the exposure it's hedging, helping reduce or eliminate the P&L volatility that would otherwise come from marking derivatives to market. Read more → /hedge-accounting
What is a cash flow hedge?
A cash flow hedge is a hedge accounting designation used when a derivative offsets variability in future cash flows from a forecast transaction, such as a future foreign-currency purchase or sale. Read more → /hedge-accounting
What is a fair value hedge?
A fair value hedge is a hedge accounting designation used when a derivative offsets changes in the fair value of an existing asset or liability, such as a fixed-rate loan or inventory holding. Read more → /hedge-accounting
What is IFRS 9 and ASC 815 hedge accounting?
IFRS 9 are international accounting standards governing hedge accounting, setting out the rules for documenting hedge relationships, testing effectiveness, and recognising gains and losses on qualifying hedges. Read more → /hedge-accounting
What is hedge effectiveness testing?
Hedge effectiveness testing is the process of demonstrating that a hedging instrument is expected to, and actually does, offset changes in the value or cash flows of the hedged item, as required for hedge accounting. Read more → /hedge-accounting
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