soloverview commodity risk management
DESCRIPTION
Commodity Risk ManagementTRANSCRIPT
Commodity Risk Management in
SAP Treasury and Risk Management
Heike Ripp
Solution Management Treasury
SAP AG
© SAP AG 2009. All rights reserved. / Page 2
Legal Disclaimer
This presentation is a preliminary version
and not subject to your license agreement
or any other agreement with SAP.
This document contains only intended
strategies, developments, and functionalities
of the SAP® product and is not intended to
be binding upon SAP to any particular
course of business, product strategy, and/or
development. Please note that this document
is subject to change and may be changed
by SAP at any time without notice.
SAP assumes no responsibility for errors
or omissions in this document.
© SAP AG 2009. All rights reserved. / Page 3
Financial Excellence with
Treasury Applications from SAP
Treasury applications from SAP
SAP Treasury and Risk Management
Risk Analyzers
Transaction ManagerMoneyMarket
ForeignExchange
Secu-rities
Com-modities
Deri-vatives
Debt Mgmt
Manage Global
Financial Risks
Optimize Debt and
Investment Strategies
Manage Cash
and Liquidity
SAP Cash and Liquidity Management
Cash Management Liquidity Planning
Optimize Payments and
Bank Communication
SAP In-House Cash
SAP Bank Communication Management
Exposure Management Hedge Management
Credit Risk Analyzer Market Risk Analyzer Portfolio Analyzer
Credit Risk Analyzer
Utilization: Formulas, Credit
risk, Settlement risk
Limit management:
Limits freely definable,
Multidimensional limits
Market Risk Analyzer
Price calculator: NPV, Prices,
Sensitivities
Value at risk: Variance/covariance,
Historic, Monte Carlo Simulation
Simulate rates: What-if scenario,
Relative, Absolute
Portfolio Analyzer
Yield calculations:
Money weighted,
Time weighted,
Modified Dietz method
Benchmarking:
Performance Indicators
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Front office: Position and deal reporting, Deal capture, Exercise, Dealer slip, Valuation tools,
Online limit check
Back office: Standing instructions, Correspondence Monitor, Netting, Settlement, Rate fixing
(interest, FX), References, Corporate actions, Process monitors
Accounting: Flexible accounting determination, Accounting according to many international
accounting standards
Spot
Forward
Swaps
Options
Futures
Foreign
Exchange Bonds
Bank loans
Commercial Paper
Facilities
Debt Mgmt Securities
Bonds Warrants Stocks Certificates Repo Sec. lending
Derivatives
Cap Floor FRA Swaps Options Futures
Money
Market Fixed –term
deposits Commercial
Paper Repo
Commodities
Futures
Forwards
Traded Options
Transaction Manager
Hedge ManagementExposure Management
Centralized Database to gather group and
version data and transfer to Hedge ManagementAdministration of hedge plans, exposures, hedge
items and hedging relationships
Risk Analyzers
© SAP AG 2009. All rights reserved. / Page 4
SAP Treasury and Risk Management
Reporting tools:
SAP Query, ABAP List, Other
3rd-party providers, BI,
Business Object Xcelsius and
Dashboards
Middle office:
Risk exposure, Controlling,
Compliance
Management reports:
Positions, Performance, Ratios,
Compliance
Ad-hoc reporting:
Point & click, Unified
databases, Position, P&L,
Period, Cash Flow
Results database:
Portfolio Hierarchy, Drill-down,
Historic results
Data export:
Excel, Flat files, BI
Reporting
© SAP AG 2009. All rights reserved. / Page 5
Instrument Support
Money Market
Fixed-term deposits (e.g., overnightdeposits at notice)
Commercial paper
Repo
Floating rate
Any cash flows
Spot
Forward
Swap
Vanilla options
Barrier options (single and double)
Compound options
Delayed Delivery options
Average rate options
Basked options
Exchange-tradedoptions
Foreign
Exchange
Securities
(Investments)
Bonds
ABS /MBS /CMO
Index-linked bonds
Dual currency
bonds
Drawable bonds
Warrant Bonds
Stocks
Shareholdings
Subscription rights
Investment
certificates
Repo/ Reverse
Repo
Security lending
Cap
Floor
FRA
Swaps
Payer/Receiver, Fixed/Basis, Exotics (e.g. roller coaster)
OTC options
Security, Swaption, IRG
Futures
Exchange traded options
Interest &
Equity
Derivatives
Debt
Management
Issued bonds
Fixed/ floating/ zero interest, Bullet repayment/ with repayment/ ABS structures
Fixed rate loans
Floating rate loans
Annuity loans
Commercial Paper
Facilities (bilateral or syndicated)
P o r t f o l i o A n a l y z e r
M a r k e t R i s k A n a l y z e r
R e p o r t i n g
T r a n s a c t i o n M a n a g e r
C r e d i t R i s k A n a l y z e r
Futures
Forwards
Traded Options
Commodities
© SAP AG 2009. All rights reserved. / Page 6
Process Overview
Back
OfficeAccount-
ing
Front
Office
Mid
Office
Exposure
analysis
Decision support
Comfortable deal
entry
Standing
instructions
On-line limit
check
Position reporting
Valuation
according to
several GAAP’s in
parallel areas
Support for IAS
39 / US-GAAP
and Hedge
Accounting
Flexible process
definition
Settlement
Correspondence
Interest rate
adjustments
Payments
Alert monitor
Instrument pricing
Risk analysis
Sensitivity
analysis
Re-
porting
Standard
reporting
Ad-hock reporting
Controlling
Limit reporting
Management
reporting
Commodity Management Landscape
Physical Trade
Management
Paper Trade and
Risk Management
Back office,
Accounting and
Position Management
Logistics Operations Management
Financial Execution and Management
Enterprise Reporting and Analysis
Deal Capture
• Mid Office Physical Trade
Mgmt
• Physical Trade Ops
• Portfolio Mgt
• Position Mgt
(physical)
• Expense Mgmt
• Profitability
• Mid Office Paper Mgmt
• Paper Trade “Ops”
• Paper Instrument
Mgmt (Futures,
Swaps, Options etc)
• Value at Risk
• Paper Positions
• Mid Office Operations
• Demand Forecasting
• Inventory Mgmt
• Nomination
• Scheduling
• Vessel Chartering
• Ops Management
• Back Office Execution
Mgmt
• Security & Controls
• Authorization
Concept
• Credit Check
• Invoicing &
Settlement,
Accounting
• Payments
• Documentation
• Financials
• SAP Reporting
• Review & Analyze P&L
• Complete Position
Reporting
• Audit Reporting
• Market Performance
• Custom Reporting
• Back office
• Parallel Position
management
• Hedge Accounting
• Valuation
• Settlement &
Accounting
• Front Office Trading
Support
• Deal Capture
© SAP AG 2009. All rights reserved. / Page 7
© SAP AG 2009. All rights reserved. / Page 8
Managing Commodities and Financial
Instruments Risk
All kinds of commodity types and hedging
instruments can be managed in SAP
Commodities (examples)
Crude Oil, gas, coal
Metals incl. Noble metals
Corn, maize, soybean
Coffee, cacao, cotton, sugar
Orange juice, lemon juice
Cattle (cows, pigs)
Certificates on emission
Hedging Instruments
Futures and Traded Options
Forwards
Swaps (planning status)
OTC Options (planning status)
© SAP AG 2009. All rights reserved. / Page 9
Transaction Manager – Fully Integrated
Automatic
creation of
correspondence
Valuation
(parallel)
Automatic
posting
Margin
managemen
t/ Periodic
Activities
Traded Options: Create Commodity Option
Master Data
The underlying commodity for the commodity option is not the commodity itself, but rather a futures
contract for that commodity. For example, a November Aluminum option will actually be an option
for a November delivery Aluminum futures contract. In this sense, the options are on futures and not
on the physical commodity.
© SAP AG 2009. All rights reserved. / Page 10
© SAP AG 2009. All rights reserved. / Page 11
Market Risk Analysis- Commodity Future,
Forward and Listed Options
Commodity Future
For commodity futures, the NPV at the end of day after margin call is zero. But, the theoretical
price will be the discounted spot price with risk free interest for the residual maturity of future.
Commodity Forward
Theoretical price of commodity forwards is calculated, with discounting the spot price of the
Forward with risk free interest rate for the period.
Commodity Option
Price of commodity options is calculated using “Black 76” model. This model uses commodity
future price volatility of price the option (as the underlying of commodity option is commodity
future)
VaR of Commodity Paper Deals:
For all the commodity paper deals in the system, it is possible to calculate the Value at Risk
(VaR)
© SAP AG 2009. All rights reserved. / Page 12
Hedging Item (Exposure) Hedging Instrument (Derivative)
Hedge Management
Hedging Relationship
Effectiveness
test /valuation
Hedge Accounting
Commodity Hedge Lifecycle
Capture
Commodity
Exposure
Hedge
Designation
Hedge
Maintenance
Hedge
Dedesignation
Capture
commodity price
Exposure
Assign Exposure
to Commodity ID
Create Exposure
Position
Link Exposure
Position To Hedge
Plan
Define risk
management strategy
Type of hedge-
FVH/CFH
Risk being hedged
Exposure – hedged
item
Derivative – hedging
instrument
Hedge strategy
Prospective
effectiveness test -
Assessment
Periodic Effectiveness
tests – retrospective
Hedge effectiveness
Assessment and
Measurement
Hedge Accounting
FVH – P&L volatility via
derivative FV
CFH – Effective part of
changes of FV to OCI
CFH – Ineffective part
of FV changes to P&L
Prospective test –
Assessment
Specify the cause
of Dedesignation
Hedge termination
Accounting entries
CFH – Release
OCI balances to
P&L
© SAP AG 2009. All rights reserved. / Page 14
Exposure Management – Example for
Commodities
Exposure
Management
Transaction
Manager
Hedge
Management
Market Risk
Analyzer
Treasury and Risk Management
SAP ERP
Operations
SD, MM
or GTM
Excel
Spreadsheets
Other sources
of Exposures
SAP ERP Financials
Commodity front office system - if needed
© SAP AG 2009. All rights reserved. / Page 15
Risk
identification
Build
exposure
positions
Deal
request
Financial Risk Management Process Using
Exposure Management
Hedge
Management
Gathering
Data from
from various
source
systems
Classify
Exposure as
forecasted
transaction
firm
commitment
and link to
different risk
factors like
commodity
price or
foreign
exchange
risk
(EUR-USD)
Storage and
update of
the lifecycle
of the
Exposure
positions
Risk
dashboard
combining
operational
and financial
Exposures
Possibility to
calculate
various risk
key figures
like Net
Present
Value and
Value at Risk
on Exposure
positions as
well as
financial
transaction
Calculated
exposures
are available
as hedged
item in
hedge
management
Possibility to
generate
deal
requests out
of the
Exposure
position and
send it to
marketplace
or front
office
system
Lifecycle
of Exposure
Position
NPV /VaR
calculation
Risk
Dashboard
Transfer Exposure to Hedge Platform
© SAP AG 2009. All rights reserved. / Page 16
© SAP AG 2009. All rights reserved. / Page 17
Commodity Price Risk Hedging
Features
The commodity exposures can be hedged using the commodity paper deals (Futures,
Forwards)
Type of Hedges Supported
Cash Flow Hedge
Fair Value Hedge
Hedge Accounting for commodities in compliance to IAS 39 and FAS 133
Roll-over of commodity deals
Prospective and Retrospective effectiveness test on commodities
Tests Supported
Dollar Offset Method
Liner Regression Method
© SAP AG 2009. All rights reserved. / Page 18
Thank you!
© SAP AG 2009. All rights reserved. / Page 19
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