soloverview commodity risk management

Commodity Risk Management in

SAP Treasury and Risk Management

Heike Ripp

Solution Management Treasury

SAP AG

© SAP AG 2009. All rights reserved. /

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and not subject to your license agreement

or any other agreement with SAP.

This document contains only intended

strategies, developments, and functionalities

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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

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SAP assumes no responsibility for errors

or omissions in this document.


Financial Excellence with

Treasury Applications from SAP

Treasury applications from SAP


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

xxxxxxxxxxxxxxxxxxxxxxxx

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



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


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


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



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)


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.



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)


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


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


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



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


Thank you!


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