Glossary of Terms

UK Corporation tax - chargeable gains.
A pool of shares acquired on or after 1 April 1982 for coporation tax purposes.

Face value or nominal value means the principal amount evidenced by a security certificate.

For a discount instrument, the face value is the amount repayable at maturity; so the current market price before maturity is always less than the face value.

For an interest bearing instrument, the face value is the amount on which interest is calculated.
So the amount repayable at maturity is given by the face value plus accrued interest.
The current market price of an interest-bearing instrument before its maturity may be less than, more than, or the same as the face value; depending on current market yields.

A payment that is made by the physical exchange of instruments by the payer and the payee, both of which are in the same physical location.

A commitment fee which is applied to the total amount of a committed lending facility regardless of the amount drawn.

The sale or transfer of legal title to accounts receivable to a third party (factor), either with or without recourse. Often a convenient but relatively expensive form of finance for weaker corporate credits.

A financing technique whereby a company sells its invoices, at a discount, to a factor. The factor then becomes responsible for collecting the debt.

Arrangements can be with or without recourse. Recourse factoring allows the factor to recover any losses caused by bad debts from the borrower.

1. Financial companies that purchase or manage other companies’ receivables.

2. Maths.
Inputs to a calculation process, for example Discount factors.

3. More generally, inputs to a decision process, which may or may not be expressly quantified.

Resources which are used in production, classically being land, labour, capital and enterprise.

Also known as Output price index.

(FOA). Formerly, one of the two professional actuarial bodies in the UK, based in Edinburgh - the other body being the Institute of Actuaries.

Now merged with the Institute of Actuaries to form the Institute and Faculty of Actuaries.

A transaction such as a funds or securities transfer, that does not settle on the contractually fixed date.

Failure is generally due to technical or temporary reasons.

Also known as Fair value.

1. The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

2. More specifically, the price at which an asset can be bought or sold in transparent markets, where contracting parties are informed and act in their best interest. It represents the theoretical equilibrium price of securities or derivatives on open markets, for example, both buyers and sellers do not perceive them as overpriced or under-priced.

3.Financial reporting.
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Also known as Fair market value.

Statistics.
A falling yield curve means yields are lower for longer maturities.

Statistics.
A Type II error.

Statistics.
A Type I error.

In an FX swap contract, the later re-exchange of the two currencies in the contract.
(Following the initial exchange of the same currencies and related amounts in the opposite direction, in the 'near leg').

1. US Accounting.
Federal Accounting Standard issued by the Federal Accounting Standards Board. Short form of Statement of Federal Accounting Standard (or SFAS).

Also known as FASB.

2. UK Pensions.
Financial Assistance Scheme.

1. Federal Accounting Standards Board.

2. Statement of Financial Accounting Standard issued by the Federal Accounting Standards Board.

Financial modelling.
Flexible, Accurate, Structured, Transparent.
The key purposes of the FAST Modeling Standard.

A set of rules on the structure and detailed design of spreadsheet-based models.
The FAST Standard is designed to provide:
(i) A clear route to good model design for individual modellers, and
(ii) A common style platform on which modellers and reviewers can rely, when passing models amongst each other.

(FMCG). Products that are sold quickly at relatively low cost.

The framework under which the Faster Payments Service operates.

(FPS).
UK process for electronic payments, typically made via the internet or phone, to be processed in hours rather than days.

It allows credit transfers and standing orders to be paid in near real time. There is a maximum transaction amount. It is operated by VocaLink 24 hours a day, 7 days a week.

Anti-money laundering.
Financial Action Task Force.

1. Financial Conduct Authority.

2. Fellow of the Institute of Chartered Accountants in England and Wales.

1. Fraud Compensation Fund.

2. Free Cash Flow.

Fonds Commun de Placement.

Fellow of the Association of Corporate Treasurers.

Fictional Currency Unit.

Used for illustrative purposes in some foreign exchange training materials.

Finance Director. Equivalent to Chief Financial Officer.

Commonly used term for a volatility index.

Portfolio analysis.
The feasible set comprises all the possible investment portfolios which can be constructed from the available universe of individual investments.

US Banking.
Federal Reserve System.

US Banking.
Funds deposited by commercial banks at Federal Reserve Banks, including funds in excess of bank reserve requirements.

Banks may lend federal funds to each other on an overnight basis at the federal funds rate to help the borrowing bank satisfy its reserve requirements or liquidity needs.

(FAS). US Accounting.
An accounting standard applicable to private sector entities reporting under US GAAP, issued by the Federal Accounting Standards Board.

(FASAB). US Government accounting.
The US Government Accounting Standards Board.

The Board issues a number of Statements of Federal Financial Accounting Concepts (SFFAC) and Statements of Federal Financial Accounting Standards (SFFAS) which cover aspects of accounting standards similar to those issued to the private sector by the Federal Accounting Standards Board (FASB).

Details of their work and standards are available at: www.fasab.gov.

(FASB). US Accounting.
The US equivalent of the Accounting Standards Board in the UK.

Information about FASB's work and accounting standards is available from: www.fasb.org.

US Tax.
The equivalent of UK corporation tax paid in the US by US resident companies.

US Banking.
The Federal Reserve System.

US Banking.
1. Strictly one of the the twelve Federal Reserve Banks which form a major part of the Federal Reserve System, the central banking system of the United States.

2. (Fed). More loosely, the central bank in the US.

US Banking.
Common name for The Board of Governors of the Federal Reserve System.

US Banking.
Often referred to as the Federal Reserve or simply 'the Fed,' the central banking system of the United States which sets, implements and supervises monetary policy.

Funds transfer.
The same-day value electronic funds transfer system operated in the US by the Federal Reserve Bank (Fed).

Funding For Lending.

Funds Flow from Operations.

A currency without intrinsic value.

Money without intrinsic value.

FICtional currency unit.

Used for illustrative purposes in some foreign exchange training materials.

Law.
A fiduciary is a person who occupies a position of trust in relation to someone else such that he is required to act for the latter's benefit within the scope of that relationship.

Accounting.
First In First Out.

UK Tax.
Franked Investment Income.

A rule for buying and selling securities based on the premise that, once a movement in a currency's exchange rate has exceeded a given percentage, it will continue to move in the same direction.

Irrevocable and unconditional.

A Defined Benefit pension scheme where the benefit for each year of membership is related to the pensionable salary received in the final year, or sometimes to the average pensionable salary over the last two or three years.

Law.
A settlement which is irrevocable and unconditional.

Also known as settlement finality.

Law.
A transfer that is irrevocable and unconditional and results in a discharge of the obligation.

Equivalent to Final.

1. The practice and theory of managing money.

2. To provide or to obtain funds, capital or credit.

3. The capital loaned for a particular purpose, especially that which has to be raised to start a new project.

Law.
An annual Act of Parliament in the UK which contains the tax legislation from the budget.

1. Finance lease accounting.
The component of the finance lease instalments payable which is effectively an interest charge, rather than a capital payment.

2. Any amount payable in relation to borrowings - or to effective borrowings - which is additional to the repayment of the net amounts borrowed.

(FD). Sometimes known as the Chief Financial Officer.

A finance lease usually involves the lessee (user of the asset) paying - over the life of the lease - the full cost of the asset plus a return on the finance effectively provided by the lessor.

The lessee-user effectively retains substantially all the risks and rewards of ownership.
However, the lessee does not obtain legal title to the leased asset.

Under IAS 17 and SSAP 21, finance leases have to be accounted for 'on balance sheet' by the user of the asset.
This means that the liability to pay (the capital element of) the future lease instalments is recognised and disclosed on the face of the balance sheet.

Also known as a capital lease, especially in the US.

An operation involving the setting up of an offshore subsidiary for the purpose of issuing debt and lending the borrowings on to the parent or another subsidiary. The parent normally guarantees the debt issues.

The collation and presentation of financial information primarily with a view to external financial reporting.

(FATF). Anti-money laundering.
An inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing.

It has issued a number of recommendations - the 40 Recommendations, which form the basis of most countries’ anti-money laundering legislation plus 9 Special Recommendations on Terrorist financing.

1.
Analysis of a business based heavily on its reported financial information.

2.
A wider and deeper quantitative and qualitative assessment of a business, based both on its financial statements and other relevant information.

A financial asset is an asset whose value is dependent on the obligation of another person or entity.

IAS 32 defines a financial asset as an asset that is any of the following:

1. Cash; or

2. An equity instrument of another entity; or

3. A contractual right to:
3.1. Receive cash or another financial asset from another entity; or
3.2. Exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the reporting entity; or

4. A contract that will or may be settled in the reporting entity's own equity instruments and is either:
4.1. A non-derivative for which the entity is or may be obliged to receive a variable number of the entity's own equity instruments; or
4.2. A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments.

(FAS). Pensions.
A limited compensation scheme set up by the UK Government to support benefits payable by pension schemes winding up between January 1997 and April 2005 and unable to pay benefits in full.

(FCA).
One of two key regulators for the financial services industry in the UK.

The FCA's aims include:
1. Protecting consumers;
2. Ensuring the industry remains stable; and
3. Promoting healthy competition between financial services providers.

The Financial Conduct Authority's responsibilities were formerly undertaken by the Financial Services Authority (FSA).
The former FSA's other responsibilities were substantially transferred to the Prudential Regulation Authority (PRA).

Loan documentation.
A clause in a loan agreement that commits the borrower to operate within predefined financial constraints.

For example, an interest cover covenant might state that interest cover will be no less than 3 times; the borrower promises that the ratio will always exceed the set figure.

Breach of a financial covenant would normally constitute an event of default.

Additional costs suffered by borrowers with high or excessive levels of debt.

Futures.

A security or other contract giving the holder of the financial instrument a claim on another party.

IAS 32 defines a financial instrument as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

(FIUs). Anti-money laundering.
The generic name for the dedicated agencies set up by various countries to combat money laundering and terrorist financing.

IAS 32 defines a financial liability as liability that is any of the following:

1. A contractual obligation either to:
1.1. Deliver cash or another financial asset to another entity; or
1.2. Exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the reporting entity.

2. A contract that will or may be settled in the reporting entity's own equity instruments, and is either:
2.1. A non-derivative for which the entity is or may be obliged to deliver a variable number of the reporting entity's own equity instruments; or
2.2. A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the reporting entity's own equity instruments.

The risk that business performance is affected adversely by price movements or other adverse changes in financial markets such as the foreign exchange market.

Markets trading financial instruments.

(FMA). A US-based educational association providing professional education and training for the financial services industry.

A simplified representation of a financial situation, using a selected set of simplifying assumptions and relationships.

Financial models are widely used as tools for valuation and to support financial decisions.

The process of writing and using financial models.

(Spelled modeling in North America.)

A plan to provide the financial resources to meet the existing obligations of a business and to finance its future development in the context of the corporate plan.

The risk that the value of a firm or of an investment may vary because of changes in financial prices (principally foreign exchange rates, interest rates or commodity prices).

1. Financial reporting (or financial accounting) is primarily concerned with collating and providing information for publication to external stakeholders and to the financial markets.

2. The term is also used by some organisations in a broader sense, to include internal reporting (as well as external).

(FRC). The regulatory body in the UK that sets, monitors and enforces accounting, auditing and actuarial standards.

Its functions also include overseeing the regulatory activities of the professional accountancy bodies regulating audit, and promoting high standards of corporate governance.

FRRP). Established in 1990 as part of the Financial Reporting Council.

The Panel sought to ensure that the provision of financial information by public and large private companies complied with relevant accounting requirements.

The work of the Panel is now carried out by the Monitoring Committee.

(FRS). A mandatory statement of accounting practice for the UK, issued by the Accounting Standards Board.

(FRSSE). Reporting standards issued by the Accounting Standards Board for small companies or groups.

1. Financial risk in the Capital asset pricing model means the component of total risk resulting from a firm’s capital structure. The more net debt in the capital structure, the greater the financial risk.

2. The term is also used more generally to mean the wider risk of uncertain financial outcomes.

For example the risks arising from not knowing the home currency value of a foreign currency receipt in the future, or the uncertainty regarding the size of future interest payments on floating rate borrowings.

(FSA). The former UK body which, amongst its duties, was the regulatory authority in the UK for most financial services markets, exchanges and firms.

The FSA's former responsibilities have now been divided and transferred to:
1. The Financial Conduct Authority; and
2. The Prudential Regulation Authority.

Some of the FSA's functions were comparable with the CFTC in the United States.

(FSB). An international board consisting of central banks and other members including national authorities and institutions, established to promote international financial stability.

US.
(FSOC.)
The Financial Stability Oversight Council was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) for three main purposes:

1. To identify risks to the financial stability of the United States that could arise from the financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or non-bank financial companies, or that could arise outside the financial services marketplace.

2. To promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the US government will shield them from losses in the event of failure.

3. To respond to emerging threats to the stability of the US financial system.

Accounting.
Commonly called 'the accounts'. Under International Accounting Standards (IAS) a full set of 'financial statements' consists of the primary financial statements and the notes.

Financial statements show the financial position of the reporting entity at the end of the reporting period and its performance for the period under review.

1. UK Tax.
A period for which the rate of UK corporation tax is set. It runs from 1st April to the following 31st March.

2. Financial reporting.
The 12-month period for which financial accounts are prepared.

UK Financial reporting.
Cash flows from financing activities are cash flows from external providers of capital/finance.

1. Any commercial undertaking, whether organised as a company, a partnership, or otherwise.

2. A business partnership.

Unconditional order to purchase or sell securities during a specific period at a specified price.

(FIFO). Accounting.
A method of allocating stock for valuation purposes which assumes that the stock acquired or produced first is used first.

A debenture secured by a mortgage on a specific asset of the issuer.

It is known as a 'first' mortgage because it ranks higher than any second mortgage over the same asset, and it also ranks higher than any 'floating charge' mortgage over the assets and undertaking of the issuer more generally.

(FYA). UK Tax.
Special accelerated UK capital allowances available from time to time on qualifying expenditure made during specific periods for certain sizes of organisations or certain types of investment.

1. Relating to government revenues and spending, especially to government tax revenues.

2. US. Relating to finance more generally, especially to public sector finance.

3. US. Relating to a fiscal year.

Economics.
When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings).

Government policy on spending and taxation of households and firms.

The risk of adverse effects arising from changes in relevant tax law or practice.

1. A UK tax year for individuals which runs from 6th April to the following 5th April.

2. More generally, a specified period for tax calculation purposes.

3. US. A financial year.

The theory that 'real' (= excluding inflation) interest rates should be the same in different currencies.

From this theory it then follows that any observed differences in nominal interest rates (= including inflation) are explainable by differences between the inflation expectations for the two related currencies.

The same as Fisher-Weil duration.

Risk management.
Duration calculates the weighted average timing of the cashflows of an instrument, weighted by the present values of the cashflows.

Two forms of the duration measure are Macaulay's duration (which is simpler) and Fisher-Weil duration (which is more refined).

Macaulay’s duration assumes a flat yield curve - in other words the same yield (to maturity) for all maturities of cashflow.

Fisher-Weil duration is a refinement of Macaulay’s duration which takes into account the term structure of interest rates.Fisher-Weil duration calculates accordingly the present values of the relevant cashflows (more strictly) by using the zero coupon yield for each respective maturity.

This refinement is particularly important when the cash flows are longer term and when yields vary significantly for different maturities.

Economics.
A formal expression of the quantity theory of money defining the relationship between the quantity of money in the economy, its velocity of circulation, the number of transactions over a given period and the general level of prices.

The equation is conventionally expressed as: P = MV/T

Where:
P = the general level of prices
M = the quantity of money in the economy
V = its velocity of circulation, and
T = the volume of transactions in a given period.

Credit rating.
Fitch Ratings, a leading credit rating agency.

Anti-money laundering.
Financial Intelligence Unit.

Porter's Five Forces of Competition model.

Assets which are held by an entity to be used in its operations. They are held for longer periods than current assets, being used by the entity for a number of years.

Law.
A charge attached to a specific asset or assets and which prevents dealing in those assets without the consent of the secured creditor.

A cost which stays the same regardless of the level of production or other activity.

Also known as Base currency.

UK Tax.
Stamp duty payable at a fixed money amount (for example £5).

Contrasted with an ad valorem basis of calculating the duty.

A system in which the value of a country's currency is tied to a major currency, such as the US dollar, gold or Special Drawing Rights (SDR).

The term usually allows for fluctuations within a range of 1 or 2 per cent on either side of the fixed rate.

Also known as fixed rate.

Interest calculated as a constant prespecified percentage of the principal amount, and payable at prespecified intervals, often semi-annually or annually.

Also known as fixed rate interest.

A bond paying a fixed nominal coupon. In other words, not a coupon linked to some index or at a margin above some published reference rate.

Also known as a nominal bond.

A party that makes swap payments calculated on the basis of a fixed rate.

A loan with a fixed date or dates for repayment.

1. The setting of an interest rate for a predetermined future period. For example, the periodic re-setting of the interest rate on a floating rate loan.

2. The use of derivative instruments such as Fixed rate agreements (FRAs) for hedging purposes, to effectively fix a hedged rate.

3. A fixing instrument (or fixing derivative) is one which hedges an exposure by effectively fixing a hedged rate for it. Contrasted with an insurance-type instrument, such as an option.

Risk management.
A fixing instrument - or fixing derivative - is one which hedges an exposure to a variable market rate or market price by effectively fixing a hedged market rate for it.

Examples include forward contracts, futures contracts, FRAs and swaps.

Contrasted with insurance-type instruments, such as an options.

Statistical analysis.
This means that the yield is the same for all maturities of funds. For example the 1 year yield = 2 year yield = 3 year yield, and so on.

The relationships between the zero coupon yield, the forward yield, and the par yield depend on the basis on which the yields are quoted. When all rates are quoted on an annual effective rate basis and the annual effective yield curve is flat, the zero coupon yield, the forward yield and the par yield are all the same.

Flexible budgeting.

A comparison of budgeted costs at the budgeted activity level with actual costs at the actual activity level is meaningless if there is a significant difference between budgeted and actual activity levels.

If actual costs are dramatically higher than budget, it does not necessarily mean that costs are out of control, if sales levels are dramatically higher than planned.

Actual fixed costs should be the same as budgeted, regardless of changes in sales levels – only the variable costs should change.

It is essential that actual costs and revenues are compared with planned amounts. However, to make the comparison meaningful, it is essential to adjust the variable cost element of the budget to reflect the actual activity levels. This process is referred to as ‘flexing the budget’.

1. Time interval, or delay, between the start and completion of a specific phase or process that occurs along the cash flow timeline. Certain types of float can be quantified and expressed in dollar amounts.

2. The timing benefit enjoyed by insurance companies of receiving insurance premia in advance (of the period covered by the related insurance contract).

3. The initial offering for sale/listing of a company’s shares on an exchange.

4. The act of removing a fixed foreign exchange rate regime and allowing a currency to be freely traded.

Banking.
Electronic disbursement on the same day as value would have been lost had the payment been made by cheque.

Alternative spelling of flotation.

Law.
A charge over the general assets of a company, such as stock.

The assets may change and the company can use the assets without the consent of the secured creditor until the charge 'crystallises' (becomes fixed). Crystallisation happens on the appointment of an administrative receiver, on the presentation of a winding-up petition or as otherwise provided for in the document creating the charge.

A debenture secured by a floating charge on the assets and undertaking of the borrower.

A system in which the value of a currency relative to others is established by the forces of supply and demand in the foreign exchange markets. Strictly speaking, this implies that intervention by the government should be absent.

Any method of paying interest that is periodically refixed in line with the current market rate.

Floating rate interest is not fixed for the life of the issue, but is periodically reset according to a predetermined formula.

Floating rate debt, for example, carries an interest rate which will vary as market interest rates vary.
(There is a time lag between the setting of the rate for each tranche of interest at the start of the interest calculation period, and its payment at the end of the interest period.)

Same as a Floating rate note (FRN).

(FRN). A bond, normally with a fixed maturity, where the interest coupon is adjusted at regular intervals reflecting the prevailing market rate (usually at a margin over LIBOR).

A party that makes swap payments calculated on the basis of a floating rate.

Options trading and hedging.
An option hedging structure which effectively establishes a minimum worst case hedged rate or price for a cash inflow or an asset, while allowing the holder of the floor to retain the potential benefit of favourable higher market rates or prices.

The initial listing of a company’s shares on an exchange.
Also spelled 'floatation'.

The sale of shares, originally placed with overseas investors, back into the domestic market by those investors.

Financial Markets Association.

Fast Moving Consumer Goods.

Faculty of Actuaries.

Free Operating Cash Flows.

(FCP). Type of collective investment scheme available in France and Luxembourg, which provides participants with co-ownership of a portfolio of securities managed by an investment management company.

Unlike Societe d'Investissement a Capital Variables (SICAVs), FCPs are not distinct legal entities.

The FTSE 100.

1.
A long-term security issued by a borrower in the capital market of a country other than the borrower's.

Usually underwritten by a syndicate from one country and sold in that country's capital market, the bond is normally denominated in the currency of the country in which it is sold.

Examples include Bulldog bonds, Panda bonds and Yankee bonds.

2.
The term is also sometimes used (incorrectly) to refer to a global bond or to an international bond.

Also known as Currency bank accounts.

An issue where the coupon is paid in a different currency from that of denomination of principal.

The right, but not the obligation, to buy or sell a fixed amount of a foreign currency at a pre-agreed price before or on a specific day.

1. A cross-currency interest rate swap.

2. A foreign exchange swap contract.

1. A transaction for the exchange of one currency for another.

2. Any currency other than the domestic currency.

Often represented as FX or FOREX.

Also known as currency contract.

An abbreviation for Foreign exchange forward contract.

A transaction which solely involves the exchange of two different currencies:
(i) on a specific future date
(ii) at a fixed foreign exchange rate which is pre-agreed at the outset of the contract.

Foreign exchange forward contracts are used - among other purposes - for hedging forward foreign exchange exposures.
For example known or likely future currency receivables and payables.

They are priced by adjusting the spot foreign exchange rate to reflect the interest rate differential between the two currencies involved for the forward period.

Also known as a Forward foreign exchange contract, or a Foreign exchange forward.

Also known as Currency option.

A browser-based electronic marketplace that regroups several foreign exchange providers who provide online quotes in real time, thereby enabling foreign exchange products to be traded on a fully automated basis.

Foreign exchange portals are increasingly being used for smaller foreign exchange trades that do not require human intervention.

The price for a foreign exchange transaction.

The risk of adverse effects following changes in foreign exchange rates.

Also known as Currency risk.

The risk that one party to a foreign exchange transaction will pay the currency it sold but not receive the currency it bought.

It is also often referred to as 'Herstatt risk', although arguably this is too limited a term given the differing circumstances in which foreign exchange settlement risk has materialised.

Also called cross-currency settlement risk or principal risk.

A transaction which solely involves:
(A) An exchange of two different currencies (i) on a specific date (ii) at a fixed foreign exchange rate which is pre-agreed at the outset of the contract; and
(B) A reverse exchange of the same two currencies (i) on a later pre-specified date (ii) at a fixed exchange rate which is usually different and which is also pre-agreed at the outset of the contract.

The uses of foreign exchange swap contracts include the transformation of short term borrowings or deposits from one currency into another.

Not to be confused with a swap, which is different.

One who stands ready to buy and sell currencies out of inventory and expects to earn a profit for the costs and risks incurred.

Credit allowed against a domestic tax liability for foreign taxes paid or suffered.

1. Accounting.
A loss which the directors estimate will arise over the duration of a long term contract.

2. Law.
A potential loss which it is reasonable to expect that a person would anticipate following from their wrongdoing, and for which they are therefore held liable in law.

Foreign exchange.

A process of purchasing a negotiable instrument without recourse to previous holders, the credit of the negotiable instrument normally having been strengthened by the additional of an aval.

Law.
Signing another person's name to any document or altering or falsifying documents.

Forward market.

A forward contract is a binding agreement either to buy or to sell a certain amount of a foreign currency or another traded asset at a predetermined price at a specified time in the future.

Forward contracts are bilateral agreements. One of the parties is contractually obliged to buy the asset, and the other party is similarly obliged to sell the asset.

The situation in which the spot price of a currency is greater than the forward price of that currency.

The market for forward contracts for the exchange of currency at some future date.

The usual forward maturities are for one, two, three, six and twelve months, although contracts for other maturities may be negotiated.

The same as Foreign exchange forward contract.

The agreed exchange rate on the day a transaction is entered into for a foreign currency transaction that settles more than two days in the future.

The rate is determined by adjusting the spot rate to reflect the interest rate differential between the two currencies involved for the forward period.

Forward forward borrowing, or Forward forward deposit.

A forward forward borrowing is a contract struck today, for the physical borrowing of funds at a fixed future date.
(At an agreed rate, for a predetermined fixed period.)

A forward forward borrowing or deposit is a binding contract struck today, for the physical borrowing or lending of funds at a fixed future date. (At an agreed rate, for a predetermined fixed period.)

The Principal amount borrowed or lent is physically transferred between the parties, and repaid - plus the contracted amount of fixed interest - at maturity.

Not to be confused with a Forward Rate Agreement, which is a derivative contract for differences.

A forward forward deposit is a contract struck today, for the physical depositing of funds at a fixed future date.
(At an agreed rate, for a predetermined fixed period.)

1. Also known as Forward yield.

2. The market rate for a forward forward contract.

The difference between the forward rate and the spot rate of currency.

A market in which a currency or commodity is traded for forward settlement, usually for settlement within one year.

Forward points (for example one month forward points of 5-8) are a conventional short-form method of quoting multiple forward foreign exchange rates, by reference to the related foreign exchange spot quote.

The spot foreign exchange quote is adjusted by applying, for example, the one-month forward points to it, to calculate the full one month forward foreign exchange quote.

For example if the spot foreign exchange quote is GBP 1 = 1.6000 - 1.6010 USD;
And the one-month forward points are 5-8 (rising);
Then the one-month forward exchange quote is GBP 1 = 1.6005 - 1.6018 USD.

The premium that has to be paid when a traded currency‘s forward price is greater than its spot price.

The price for a transaction that has a start date in the future or later than the spot date.

1. Also known as Forward yield.

2. Today's rate for a forward foreign exchange contract.

3. The price in any market at which contracts are being struck today for settlement at a preagreed future date.

(FRA).
1.
A short term interest rate derivative. It is a contract for differences, settled on a single fixed date by reference to an agreed market interest rate, usually LIBOR.

FRAs are used by corporates to hedge or transform short term interest rate exposures.

2.
More specifically, a bilateral forward contract that fixes the interest rate on the day of the agreement for payment at a future settlement date; this can be up to two years later.

FRAs are used to hedge against interest rate exposure in the sense that one of the parties pays a fixed rate and the other a variable rate. If, at the settlement date, the market rate if lower than the previously agreed rate, the purchaser will indemnify the seller for that difference and conversely, if the market rate has risen, the seller will compensate the purchaser.

A type of interest rate swap.

A forward start swap has its first interest setting and calculation period starting at a future date.
For example, in order to hedge a loan to be drawn down at a fixed future date.

Compensation practice of banks in some jurisdictions where credits to a customer’s account statement will reflect a date later than the actual date funds were received.

Compensation practice of non-US banks where credits to a customer’s account statement will reflect a date later than the actual date funds were received.

The rate of return in the market today for a notional or actual deposit or borrowing:
(i) starting at a fixed future date; and
(ii) ending on a later fixed future date.

Also known as the Forward rate or Forward forward rate.

A firm which specialises in providing advice and assistance to exporters in the carriage of freight.

Also known as a Freight forwarder.

A model that proposes a number of related conceptual linkages between differences in:

(i) Interest rates;
(ii) Spot and forward foreign exchange rates;
(iii) Expected inflation rates; and
(iv) The expected change in spot foreign exchange rates.

The related individual linking theories are:

(1) Interest rate parity theory - linking interest rates & spot and forward foreign exchange rates.
(2) The Fisher Effect - linking interest rates with expected inflation rates.
(3) Expectations theory - forward foreign exchange rates and future out-turn spot foreign exchange rates.
(4) The International Fisher Effect - interest rate differentials and expected change in spot foreign exchange rates.
(5) Purchasing power parity theory - inflation rate differentials and expected change in spot foreign exchange rates.

1.
Faster Payments Service.

2.
Faster Payments Scheme.

Forward Rate Agreement.

A ‘Technical Release’ from the Institute of Chartered Accountants in England and Wales (ICAEW) Financial Reporting and Advisory Group.

(FII). UK Tax.
The amount of dividends received from UK companies which are not group companies for UK tax purposes.

For tax calculation purposes the amounts of the related tax credits - under the imputation system - are aggregated with the net amounts of the dividends actually received, in order to determine the relevant amount of Franked Investment Income.

Law.
A criminally false representation by means of a statement or conduct made knowingly or recklessly in order to gain a material advantage.

Financial frauds usually involve concealment as well as false representations.

(FCF). Established under the UK pensions legislation to provide compensation to occupational pension schemes, with insolvent employers, that suffer a loss attributable to an offence involving dishonesty.

It applies to most defined benefit and defined contribution occupational pension schemes, however, it does not apply to state retirement pensions.

The FCF is a statutory fund run by the Board of the Pension Protection Fund and is funded from the Fraud Compensation Levy raised on eligible pension schemes.

It replaces the former Pensions Compensation Board.

Insolvency Law.
Carrying on business with the intent to defraud creditors.

Financial Reporting Council.

(FCF). The net figure obtained by deducting from cash generated by operations - or by an investment - that cash which has been absorbed by operations or by the investment.

Free cash flow disregards all cash flows to do with financing.

Also known as a clean float.

'There is no such thing as a free lunch.'
This statement implies that there is not normally any opportunity to earn immediate risk-free profits in financial markets.

Economics.
An economy where resources are allocated by the market by means of the market mechanism.

1. Pensions
The closure of a Defined Benefit pension scheme to new members and the cessation of future benefit accrual to existing members. It is invariably associated with the cessation of employee contributions, but may well involve the continuation of employer contributions unless there is a surplus on a discontinuance basis, in which case winding-up may also occur.

2. The blocking of the free use of assets by their owner. For example, where a bank puts a stop on the withdrawal of funds from an account.

Also known as Forwarding agent.

Statistics.
A smooth curve that joins the parts on a frequency diagram.

Statistics.
A description of the relative number of times that given outcomes have occurred, or are expected to occur, relative to the whole population.

Three important frequency distributions are the Normal distribution, Lognormal distribution, and Leptokurtic distribution, described below. All three of these types of distribution are used in practice as approximations to model the distributions of financial variables.

Normal distributions are usually the simplest approximations to work with, and are assumed by - for example - many Value at Risk analysis models and measures. A theoretical shortcoming of using normal distributions as a model is that they assume an infinitely large downside potential including negative prices; whereas many financial variables - such as asset prices - cannot in practice fall so far as to become negative.

Lognormal distributions usually describe better the theoretical range of financial variables such as traded equity prices, which theoretically have no upside limit but which cannot fall below zero.

In practice, observed financial returns are usually more closely approximated by leptokurtic distributions, with a greater frequency both of very high and of very low returns, than predicted by the comparable normal distribution. So in risk analysis, if a population distribution is assumed to be normal, but is in reality leptokurtic, downside risk will be understated.

Other common types of frequency distribution include Binomial distributions and Poisson distributions.

Statistical analysis.
A diagram that illustrates a frequency distribution using lines instead of bars.

Floating Rate Note.

The part of the treasury function that executes transactions for the cash investment, funding, foreign exchange and risk hedging requirements of the company.

The front office is the unit of the treasury which interfaces with the group’s entities or subsidiaries and provides treasury services to, and which interacts most with, the company’s lenders and other financial counterparties.

Loans.
A fee charged at the commencement of a lending facility.

Financial Reporting Review Panel.

UK. Financial Reporting Standard.

The following Financial Reporting Standards have been withdrawn or superseded:
FRS 4, FRS 13, FRS 14.

UK Financial Reporting Standard 1, dealing with cash flow statements.

UK Financial Reporting Standard 2, dealing with accounting for subsidiary undertakings.

FRS 2 was amended in June 2009 to correspond with the requirements set out in the Companies Act 2006 and the Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008.

The current UK Financial Reporting Standard 3, dealing with reporting financial performance.

(To be superseded in due course by a replacement standard under development.)

UK Financial Reporting Standard 5, dealing with reporting the substance of transactions.

The current UK Financial Reporting Standard 6, dealing with acquisitions and mergers.

Acquisitions and mergers are known more generally as 'business combinations'. FRS 6 prescribes the circumstances under which Acquisition accounting must be applied to business combinations. Mandatory acquisition accounting is the usual case.
FRS 6 also prescribes the strictly limited circumstances under which Merger accounting must be applied.

UK Financial Reporting Standard 7, dealing with fair values in acquisition accounting.

UK Financial Reporting Standard 8, dealing with related party disclosures.

FRS 8 is designed to ensure that financial statements contain the disclosures necessary to draw attention to the possibility that the reported financial position and results may have been affected by the existence of 'related parties' and by material transactions with them. Related parties include directors and other companies under common control.

However, FRS 8 allows a number of exemptions from related party disclosures in the case of companies in the same group whose results are incorporated into (publicly available) consolidated group financial statements.

UK Financial Reporting Standard 9, dealing with associates and joint ventures.

UK Financial Reporting Standard 10, dealing with goodwill and intangible assets.

FRS 10 treats purchased goodwill (and intangible assets) differently from internally generated amounts.

FRS 10 requires all purchased goodwill (and certain purchased intangible assets) to be capitalised. In most circumstances, they must then be written down through the profit and loss account, usually over 20 years or less. Impairment reviews must be undertaken, particularly if the goodwill or intangible asset is regarded as having an infinite life (and is therefore not being written down).

But internally generated goodwill should not be capitalised. And internally developed intangible assets should be capitalised only where they have a readily ascertainable market value.

UK Financial Reporting Standard 11, dealing with impairment of fixed assets and goodwill.

The development of FRS 11 shadowed the development of the international standard on the same subject, IAS 36.

UK Financial Reporting Standard 12, dealing with provisons, contingent liabilities and contingent assets.

UK Financial Reporting Standard 15, dealing with tangible fixed assets.

FRS 15 allows a high level choice as to whether the carrying values of tangible fixed assets are based on their orginal cost or on a revalued amount. However, this high level choice must then be implemented consistently (and not selectively).

So for example where an entity adopts a policy of revaluing some of its assets, ALL assets of the same class must then be revalued. And the valuations must then be kept up to date.

UK Financial Reporting Standard 16, dealing with current tax.

FRS 16 addresses all aspects of accounting for current tax and superseded Statement of Standard Accounting Practice SSAP 8.

UK Financial Reporting Standard 17, dealing with retirement benefits.

FRS 17 replaced - and widened the scope of - the earlier UK Statement of Standard Accounting Practice SSAP 24. The most significant impact of FRS 17 is in relation to defined benefit pension schemes.

FRS 17 requires any deficit in the pension scheme to be recognised in full in the sponsoring employer's balance sheet.

FRS 17 also requires pension liabilities to be measured on a more conservative basis for accounting purposes, compared with the earlier accounting under SSAP 24. This generally resulted in significantly greater pension liabilities (for accounting purposes) under FRS 17, and a greater incidence of larger pension deficits for accounting purposes.

FRS 17 requires the movement in the pension deficit (or surplus) to be analysed into a number of specified components.

Some of these components are recognised directly in the income statement, impacting reported accounting profits. These components include the expected returns on the invested pension fund assets.

Other components of the change in the pension deficit (or surplus) are recognised only in the statement of total recognised gains and losses. So these components do not affect reported accounting profits. These components include 'actuarial gains and losses' including differences between the actual returns and the expected returns on the invested pension fund assets.

UK Financial Reporting Standard 18, dealing with accounting policies.

FRS 18 deals primarily with the selection, application and disclosure of accounting policies.

UK Financial Reporting Standard 19, dealing with deferred tax.

FRS 19 requires full provision to be made for deferred tax assets and liabilities arising from tax timing differences. Tax timing differences arise from the different bases of recognising gains and losses in the financial statements and their recognition in a tax computation. For example, pension expenses are generally tax-relieved only when paid. So for example pension provisions (liabilities) for amounts not yet paid give rise to deferred tax assets.

FRS 19 permits - but does not require - the discounting long-term deferred tax balances for reporting purposes.

FRS 19 also requires a reconciliation of the difference between the effective tax rate in the income statement and the standard corporate rate of tax.

UK Financial Reporting Standard 20, dealing with share-based payment.

FRS 20 specifies the accounting treatment to be adopted (including the disclosures to be provided) by entities making share-based payments. In particular, it requires entities to recognise an expense, measured at fair value, in respect of the share-based payments they make.

FRS 20 is identical to International Financial Reporting Standard IFRS 2, concerning share-based payment and therefore has the effect of implementing IFRS 2 in the UK.

UK Financial Reporting Standard 21, dealing with events after the balance sheet date.

FRS 21 specifies the accounting treatment to be adopted by entities for events occurring between the balance sheet date and the date when the financial statements are authorised for issue.

FRS 21 is mandatory for accounting periods beginning on or after 1 January 2005 for all entities other than those applying the Financial Reporting Standard for Smaller Entities (FRSSE).

FRS 21 is identical to the International Accounting Standard IAS 10, and therefore has the effect of implementing IAS 10 in the UK and Republic of Ireland.

UK Financial Reporting Standard 22, dealing with earnings per share.

FRS 22 prescribes the basis for calculating and presenting earnings per share in the financial statements of entities whose shares are, or will be, publicly traded and other entities that choose to disclose earnings per share. It has the effect of implementing International Accounting Standard IAS 33.

FRS 22 is effective for accounting periods beginning on or after 1 January 2005 and supersedes FRS 14.

UK Financial Reporting Standard 23, dealing with the effects of changes in foreign exchange rates.

FRS 23 was designed to implement the related International Accounting Standard IAS 21. FRS 23 replaced the earlier UK Statements of Standard Accounting Practice SSAP 20.

UK Financial Reporting Standard 24, implements International Accounting Standard IAS 29, Financial Reporting in Hyperinflationary Economies.

UK Financial Reporting Standard 25, implements the International Accounting Standard IAS 32 and (for accounting periods ending 31 December 2006) covers both presentation and disclosure requirements.

For accounting periods beginning on or after 1 January 2007 the revised disclosure requirements FRS 29 replace the requirements in FRS 25.

UK Financial Reporting Standard 26, implements the recognition, measurement and hedge accounting requirements of the International Accounting Standard IAS 39.

UK Financial Reporting Standard 27, dealing with life assurance.

FRS 27 applies to all entities with a life assurance business (including a life reinsurance business).

UK Financial Reporting Standard 28, dealing with the requirements for the disclosure of corresponding amounts.

FRS 28 deals with disclosure of corresponding amounts for items shown in an entity’s primary financial statements and the notes to the financial statements.

UK Financial Reporting Standard 29, implements the International Financial Reporting Standard IFRS 7, Financial Instruments: Disclosures, together with the related amendment to International Accounting Standard IAS 1, Presentation of Financial Statements – Capital Disclosures.

FRS 29 applies only to entities applying FRS 26.

UK Financial Reporting Standard 30, dealing with heritage assets.

FRS 30 applies to all heritage assets that are held and maintained by an entity principally for their contribution to knowledge and culture. Heritage assets can have historical, artistic, scientific, geophysical or environmental qualities.

Financial Reporting Standard for Smaller Entities.

Law.
The unforeseen termination of a contract as a result of an event or circumstances that either render its performance impossible or illegal, or prevent its main purpose from being achieved.

1. The former UK Financial Services Authority.

2. The former UK Financial Services Act 1986, now consolidated within the Financial Services and Markets Act 2000.

(Not to be confused with the FMA, the Financial Markets Association.)

Pensions.
Free Standing Additional Voluntary Contribution(s).

Financial Stability Board.

US.
Financial Stability Oversight Council.

Funds Transfer System.

See FTSE 100.

1. A share index made up of the 100 largest companies on the UK stock market.

2. The 100 companies themselves.

1. A share index made up of the next 250 largest companies on the UK stock market, after the top 100.

2. These 250 companies themselves.

1. A share index made up of the largest 350 companies on the UK stock market.

2. The 350 companies themselves.

A financial institution service that matches cheques paid against the file of cheques issued by the company.

The bank supplies a listing, either as a paper report or electronically, of cheques paid and outstanding in cheque serial number order.

Economics.
An economy where resources are allocated by the government alone.

The currency of the primary economic environment in which a firm generates and expends cash.

1. The valuation of businesses based on their 'fundamental' value drivers, such as the quality of their management.

2. The prediction of changes in market rates and prices by reference to general economic conditions and to fundamental value drivers, rather than by reference to the historical market price series.

Pensions
A defined benefit pension scheme where assets are accumulated in advance of the benefits commencing to be paid.
Most UK corporate defined benefit pension schemes are funded.

1. Medium to longer term borrowing by an undertaking to meet its operational needs.

2. The provision in advance for future liabilities in a defined benefit pension scheme by the accumulation of assets.

3. More generally, the provision or the sources of finance necessary for the continuing operation of an undertaking.
In this context, sources of finance include creditors, bank lenders, bondholders and shareholders.

Pensions.
The relationship at a specified date (often the valuation date) between the value of the assets and the value of the liabilities of a defined benefit pension scheme, often expressed as a ratio (the ‘funding ratio’).

The funding level is frequently expressed as a percentage. For example, when assets are 100 and liabilities are 90, the funding level is 90/100 = 90%.

(Not to be confused with the deficit, which in this example is 100 - 90 = 10.)

Pensions.
The methodology adopted by the Scheme Actuary in undertaking an actuarial valuation.

Other terms used in a similar context include Funding objective (in other words what Funding level is desirable and when this should be reached) and Funding plan (precisely how will the desired Funding level be achieved).

Pensions.
The ratio of a funded pension scheme's liabilities, divided by its investment assets.

A formal arrangement, based on private contract or statute law, with multiple membership, common rules and standardised arrangements, for the transmission and settlement of money obligations arising between the members.

Securities or other assets that are interchangeable.
The best-known example of a fungible asset is cash.

(FV). If we invest money today (and roll up all the expected income) the future value is the expected total value of our investment at its maturity.

Or if we borrow money today (and roll up all the interest payable) the future value is the total principal and interest repayable to the lender at the final maturity of the borrowing.

For example if $100m is held today, and the rate of return on capital (r) is 10% per year, the Future value is:
FV = $100m x 1.1¹ = $110m

And more generally:
FV = Present value x Compounding Factor (CF)
Where:
CF = (1+r)ⁿ
r = return on capital or cost of capital per period; and
n = number of periods

Exchange traded contracts used for either hedging or speculating in relation to outturn market rates on a prespecified date in the future.

Because futures contracts are exchange traded they involve standard amounts and standard expiry dates. They also require a refundable up-front security payment (initial margin) and subsequent variation margin adjustments.

A standardised foreign exchange, interest rate or other contract written against the exchange clearing house for a standard fixed number of units and for delivery on a fixed date.

Because of their standardisation, futures contracts have a deep secondary market.

Future Value.

Foreign Exchange.

Foreign exchange swap contract.

A short-dated composite agreement to:

1. Exchange currencies at a fixed 'near leg' date (usually spot) and price, AND

2. To re-exchange the same related currencies and amounts at a later fixed 'far leg' date and price.

The composite pricing of the FX swap is favourable for the price-taker, compared with the pricing of the two related outright contracts (for example for spot exchange and forward re-exchange of the same currency pair).

UK Tax.
First Year Allowance.

For Your Information.