Commodity Risk Management in

SAP Treasury and Risk Management

Heike Ripp
Solution Management Treasury
SAP AG

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development. Please note that this document
is subject to change and may be changed
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SAP AG 2009. All rights reserved. / Page 2

Financial Excellence with

Treasury Applications from SAP
Treasury applications from SAP
SAP Treasury and Risk Management
Risk Analyzers

Manage Global
Financial Risks

Credit Risk Analyzer

Market Risk Analyzer

Exposure Management

Optimize Debt and

Investment Strategies

Manage Cash
and Liquidity

Portfolio Analyzer

Hedge Management

Transaction Manager
Money
Market

Foreign
Exchange

Derivatives

Debt
Mgmt

Securities

Commodities

SAP Cash and Liquidity Management

Cash Management

Liquidity Planning

SAP In-House Cash

Optimize Payments and
Bank Communication
SAP AG 2009. All rights reserved. / Page 3

SAP Bank Communication Management

SAP Treasury and Risk Management

Risk Analyzers

Reporting

Credit Risk Analyzer

Market Risk Analyzer

Portfolio Analyzer

Utilization: Formulas, Credit

risk, Settlement risk

Price calculator: NPV, Prices,

Sensitivities

Limit management:
Limits freely definable,
Multidimensional limits

Value at risk: Variance/covariance,

Historic, Monte Carlo Simulation

Yield calculations:
Money weighted,
Time weighted,
Modified Dietz method
Benchmarking:
Performance Indicators
xxxxxxxxxxxxxxxxxxxxxxxx

Simulate rates: What-if scenario,

Relative, Absolute

Exposure Management

Hedge Management

Centralized Database to gather group and

version data and transfer to Hedge Management

Administration of hedge plans, exposures, hedge

items and hedging relationships

Transaction Manager
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

Ad-hoc reporting:
Point & click, Unified
databases, Position, P&L,
Period, Cash Flow

Reporting tools:
SAP Query, ABAP List, Other
3rd-party providers, BI,
Business Object Xcelsius and
Dashboards
Results database:
Portfolio Hierarchy, Drill-down,
Historic results

Management reports:
Positions, Performance, Ratios,
Compliance

(interest, FX), References, Corporate actions, Process monitors

Accounting: Flexible accounting determination, Accounting according to many international

accounting standards
Money
Market

Fixed term
deposits
Commercial
Paper
Repo

Foreign
Exchange

Spot
Forward
Swaps
Options
Futures

SAP AG 2009. All rights reserved. / Page 4

Derivatives

Cap
Floor
FRA
Swaps
Options
Futures

Debt Mgmt

Bonds
Bank loans
Commercial
Paper
Facilities

Securities

Bonds
Warrants
Stocks
Certificates
Repo
Sec. lending

Commodities

Futures
Forwards
Traded Options

Middle office:
Risk exposure, Controlling,
Compliance

Data export:
Excel, Flat files, BI

Instrument Support

Fixed-term
deposits (e.g.,
overnight
deposits at notice)
Commercial paper
Repo
Floating rate
Any cash flows

Interest &
Equity
Derivatives

Debt
Management

Foreign
Exchange

Money Market

Spot
Forward
Swap
Vanilla options
Barrier options
(single and double)
Compound options
Delayed Delivery
options
Average rate
options
Basked options
Exchange-traded
options

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)

Cap
Floor
FRA
Swaps
Payer/Receiver,
Fixed/Basis,
Exotics (e.g. roller
coaster)
OTC options
Security,
Swaption, IRG
Futures
Exchange traded
options

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

Transaction Manager
Market Risk Analyzer
Credit Risk Analyzer
Portfolio Analyzer
Reporting
SAP AG 2009. All rights reserved. / Page 5

Commodities

Futures
Forwards
Traded Options

Process Overview

Front
Office

Exposure
analysis
Decision support
Comfortable deal
entry
Standing
instructions
On-line limit
check
Position reporting

Mid
Office

SAP AG 2009. All rights reserved. / Page 6

Instrument pricing
Risk analysis
Sensitivity
analysis

Back
Office

Flexible process
definition
Settlement
Correspondence
Interest rate
adjustments
Payments
Alert monitor

Accounting

Valuation
according to
several GAAPs in
parallel areas

Support for IAS

39 / US-GAAP
and Hedge
Accounting

Reporting

Standard
reporting
Ad-hock reporting
Controlling
Limit reporting
Management
reporting

Commodity Management Landscape

Front Office Trading

Deal Capture
Mid Office Physical Trade
Mgmt
Physical Trade Ops
Portfolio Mgt
Position Mgt
(physical)
Expense Mgmt
Profitability

Mid Office Operations

Demand Forecasting
Inventory Mgmt
Nomination
Scheduling
Vessel Chartering
Ops Management

SAP Reporting
Review & Analyze P&L
Complete Position
Reporting
Audit Reporting
Market Performance
Custom Reporting
SAP AG 2009. All rights reserved. / Page 7

Paper Trade and

Risk Management
Physical Trade
Management

Back office,
Accounting and
Position Management

Logistics Operations Management

Financial Execution and Management

Enterprise Reporting and Analysis

Support
Deal Capture

Mid Office Paper Mgmt

Paper Trade Ops
Paper Instrument
Mgmt (Futures,
Swaps, Options etc)
Value at Risk
Paper Positions
Back office
Parallel Position
management
Hedge Accounting
Valuation
Settlement &
Accounting
Back Office Execution
Mgmt
Security & Controls
Authorization
Concept
Credit Check
Invoicing &
Settlement,
Accounting
Payments
Documentation
Financials

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

SAP AG 2009. All rights reserved. / Page 8

Futures and Traded Options

Forwards

Swaps (planning status)

OTC Options (planning status)

Transaction Manager Fully Integrated

Automatic
posting

Valuation
(parallel)

Automatic
creation of
correspondence

Margin
managemen
t/ Periodic
Activities

SAP AG 2009. All rights reserved. / Page 9

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

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 11

Hedge Management
Hedging Item (Exposure)

Hedging Instrument (Derivative)

Hedging Relationship

Effectiveness
test /valuation

Hedge Accounting
SAP AG 2009. All rights reserved. / Page 12

Commodity Hedge Lifecycle

Capture
Commodity
Exposure
Capture

commodity price
Exposure
Assign

Exposure
to Commodity ID

Create

Exposure
Position

Link

Exposure
Position To Hedge
Plan

Hedge
Designation

Hedge
Maintenance

Hedge
Dedesignation

Define

Periodic

Specify

Type

Hedge

Hedge

risk
management strategy

of hedgeFVH/CFH

Risk

being hedged

Exposure

hedged

effectiveness
Assessment and
Measurement

Hedge Accounting

P&L volatility via

derivative FV

FVH

item
Derivative

hedging

instrument
Hedge

Effectiveness
tests retrospective

strategy

Prospective

effectiveness test Assessment

Effective part of
changes of FV to OCI

CFH

Ineffective part
of FV changes to P&L

CFH

Prospective

Assessment

test

the cause
of Dedesignation

termination
Accounting entries
Release
OCI balances to
P&L

CFH

Exposure Management Example for

Commodities
Commodity front office system - if needed
Treasury and Risk Management
SAP ERP
Operations
SD, MM
or GTM

Exposure
Management

Hedge
Management

Market Risk
Analyzer

Transaction
Manager

Excel
Spreadsheets

Other sources
of Exposures

SAP ERP Financials

SAP AG 2009. All rights reserved. / Page 14

Financial Risk Management Process Using

Exposure Management

Risk
identification

Gathering
Data from
from various
source
systems

Build
exposure
positions

Classify
Exposure as
forecasted
transaction
firm
commitment
and link to
different risk
factors like
commodity
price or
foreign
exchange
risk
(EUR-USD)

SAP AG 2009. All rights reserved. / Page 15

Lifecycle
of Exposure
Position

Storage and
update of
the lifecycle
of the
Exposure
positions

Deal
request

Possibility to
generate
deal
requests out
of the
Exposure
position and
send it to
marketplace
or front
office
system

Hedge
Management

Calculated
exposures
are available
as hedged
item in
hedge
management

NPV /VaR
calculation

Possibility to
calculate
various risk
key figures
like Net
Present
Value and
Value at Risk
on Exposure
positions as
well as
financial
transaction

Risk
Dashboard

Risk
dashboard
combining
operational
and financial
Exposures

Transfer Exposure to Hedge Platform

SAP AG 2009. All rights reserved. / Page 16

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 17

Thank you!

SAP AG 2009. All rights reserved. / Page 18

Copyright 2009 SAP AG

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