SAP Treasury and

Risk Management
Table of Contents

 Overview of Treasury Management

 Transaction Manager: Basics
 Master Data
 Money Market
 Foreign Exchange, Derivatives
 Securities Management
 Market Risk Analyzer
 Credit Risk Analyzer
Overview of Treasury Management

 Treasury Management comprises of the following

components:-

 Transaction Management: supports the management

of financial transactions and positions
 Market Risk Analyzer is used to analyze interest rate,
currency and stock risks.
 Credit Risk Analyzer is used to determine the credit
risks and an online limit check.
Overview of Treasury Management

Transaction Manger helps you to optimize yields and cost structures

Risk Management helps you to secure against market and credit risks
Transaction Manager: Basics
Transaction Manager: Basics
Transaction Manager
Transaction Manager

 Complete management of financial transactions and

positions
 Trading and Back Office Support
 Monitoring, Checking and Releasing
 Data transfer to financial accounting (including
accruals/deferrals and valuations)
 Assignment of financial transactions to portfolios or
management in securities accounts
 Flexible reporting and portfolio analysis
 Data interface
 Supports standardized interfaces for Financial Accounting,
Cash Management, Market Risk Analyzer, Credit Risk
Analyzer, Market data Binding
Product Types
Transaction Processing

Trading Back Office Accounting

 The trading area allows you to enter and document financial

transactions.
 In the back office area, the transactions are settled
(checked).
 In the accounting area, you post your financial deals.
Posting information is transferred to the General Ledger.
Master Data
Business Partners

 A business partner is a person, organization or group of

persons/organization with which your company can have
variety of relationships. This are 3 different categories
 Each financial transaction is linked with a business partner.
 The business partner data must be available before you
enter the transaction.
Business Partner Creation
Business Partner Creation (Continued)

 Select the business partner type such as person,

organization or group.
 Choose grouping to determine the number range for your
business partner
 Choose the role category to call up different screens
(views) when you maintain the business partner master
data.
Business Partner - Data Screens

Business Partner

Central Data: General Role Data: Company Code Data:

•Name, •Role overview •Accounting data
•Address, •Role Data •Payments
•Personal Data •Control Data •Dunning
•Legal Data •Bank accounts… •Relationships…..
•Relationships….
Business Partner - Standing Instructions

Transaction
Authorizations Payment Details

Correspondence Derived Flows

 Standing instructions are master agreements made with a business

partner for processing similar types of transactions.  
 Agreements can cover:
 Authorizations - Which financial transactions may be concluded with this
partner?
 Payment details - proposes the payment details for business partner in the
transaction
 Correspondence - which correspondence is generated for which
transactions?
 For transaction Flow X is generated, tax/commission in y% to be
calculated.
Standing Instructions - Authorizations
 Transaction authorizations
allow you to control which
transactions can be
concluded with a particular
business partner

 You can assign transaction

authorizations for business
partners at the following
hierarchy levels:
 Contract type
 Product category
 Transaction types
Standing Instructions – Payment Details
 System uses House
Bank and account id
define in business
partner payment details
to determine the bank
account to which the
posting is being made.

 After creating payment

details you must assign
them as shown in the
slide.
Correspondence
 Correspondence serves to
document and match
concluded financial
transactions.

 Through correspondence
run you can print the
generated data or send it
directly from system by
fax or email or IDOC
Standing Instructions: Correspondence
 Correspondence serves to
document and match
concluded financial
transactions.

 Through correspondence
run you can print the
generated data or send it
directly from system by
fax or email or IDOC
Transaction: Derived Flows
 Derivation procedure is used to generate certain flows
automatically. These flows are calculated on the basis of
other financial flows in the system.
 When the original flow is processed, the system
generates the dependent (derived) flows automatically.
 Example : Income tax 10 % is deducted on the interest
income (flow type 1200)
 The interest condition of the transaction generates an
interest flow of type 1200. The system adds derived flow
to the cash flow
Withholding tax Interest Income Received – Flow type
5004
Standing Instructions: Derived Flows
 We have to specify when
a particular derivation
procedure should apply to
certain business partners.

 Derivation procedure can

be assigned at different
levels (from contract type
to transaction type)
Traders & Authorizations

 Traders need to be defined per company code

 For each user you can define user parameters and make
individual settings, like abbreviations for transactions,
whether and how a workday check takes place etc.
 Then you need to use the transaction authorization to
restrict the transactions a trader may conclude
Table of contents
 Money Market
 Money Market: Product Types
 Money market transactions
Investment/ Borrowing Instruments
are for short- to medium-term
investments or borrowing
Money Market
capital. On the basis of
surpluses or deficits
 Fixed term deposits
determined in Cash
 Deposits at notice
Management, you can
 Commercial Paper
implement the planning
 Interest Rate Instrument
decisions in Money Market.
 Cash flow transaction
 Facility
Product Categories and Types

Product Categories are predefined by the system. The user

can define product types for each of the product categories
Term Deposits

 Fixed term deposits

Due date arranged from the outset
Fixed interest for the whole term
Rollover facility
 Overnight money
Term only lasts one day
 Deposit at Notice
Concluded for an unspecified period
Due date depends on the period of notice
Commercial Paper

 Short term discounted bearer bond

 No Interest payments during the term
 Term: 1 week to 1 year ( on average 2 months)
 Issuer and investor enter into a business relationship
directly and agree on a repayment amount, which the
debtor pays to the creditor at the end of the term.
 The repayment amount is discounted to the start of the
term using the required yield. The investor pays the
amount calculated to the debtor at the start of the term.
 Banks act as ‘DEALERS’ without assuming the placing
risk.
Transaction and Position Management Process: Fixed
Term Deposit

Trading Back Office Accounting

 You define limits for a particular limit type,

 The characteristics’ fields are displayed according to the
settings in Customizing for a relevant limit type; in this
example - company code and trader data need to be
entered,
 The limit is effective for a certain period of time.
Transaction and Position Management Process:
Fixed Term Deposit
Transaction Processing Areas

Money Market

Trading Back Office Accounting

Foreign Exchange

 Data entry & transaction processing phases are parallel for

both Money Market and Foreign Exchange areas.
Product Types

 Product types represent the financial transactions that are

used in your company. In the Money Market, for example,
typical transactions are fixed-term deposits or deposits
at notice.  
 A financial transaction type determines the type of
transaction you can execute with a specific product type.
Transaction Types & Number Ranges

 Each financial transaction is uniquely defined by combining a

product type with a financial transaction type,
 For each transaction type you need to define:
 Processing category that determines how the transaction is processed (in
other words, the sequence of activities).
 Number ranges
 Limit group
Flow Types

 Flows describe various payment flows arising from

transactions
 The sum of all transaction flows forms the basis for
generation of cash flow and describes possible changes to
the updated payment flows.
 For each transaction created for Money Market or Forex,
you need to enter flow types.
Offers for Fixed Term Deposits & Forex

Offer #1 Offer #2 Offer #3

Contract

 The activity category Offer allows you to group together and

store quotations from different banks with a reference.
 This enables you to sort the offers according to their quality.
You have the option of creating a contract directly from an
offer.
Creating a Fixed Term Deposit

 To create a financial transaction in the system you need to

specify:
 The company code you want to post to,
 A product type,
 A relevant transaction type,
 A business partner for this transaction.
Structure Data

 On this screen you enter basic data for your transaction,

 Fields available for data entry depend on the transaction
you process and are different for Money Market or Foreign
Exchange transactions.
Administration Data

 The General Valuation class will determine the appropriate

GL code.
 It allows you to control which G/L account (balance sheet
account) should be used to post the current financial
transaction.
 By using different account Valn class, you can post the
transaction to different GL accounts
Payment Details

 On this screen you can enter the data necessary for

payment between your own company and the business
partner.
 You need to maintain the payment details in the standing
instructions, so they appear as proposals in the transaction.
 If you haven’t done it, you need to enter payment details for
each transaction.
Cash Flow Details
Direction of flow Flow Type

 The flows contain both the payment data and all data
required for posting.
 The cash flow contains the Flow records in chronological
order.
 Again, as you can see, flow types are involved in these
transactions,
Transaction Status

Sent / confirmed
correspondence?

How the particular

activity is processed by
the system?

How a deal is to be
processed?

 The tab page shows you the current status of the financial
transaction in the Correspondence, Activity and Transaction
areas.
Transaction Rollover
Define Flow Type Define Rollover
Date

 You can roll over existing transactions using the same

transaction number, and, if required, with different
conditions.
Reverse M. Market or Forex transaction

 Reversal function resets the last change made to the

transaction (the last transaction activity recorded by the
system).  
 To reverse posted flows for a financial transaction, you
must first reverse the transaction activity. The system then
earmarks the posted flows, to indicate that the
corresponding documents have to be reversed.
Back Office Functions

 Back Office functions are applicable for the transactions

previously entered in the Trading area,

 In the back office area you can:

 Change an existing transaction,
 Settle transactions (check existing transactions and perform
position management-related processes),
 Adjust interest rate (if necessary),
 Generate and print correspondence.
Change Transaction

 You can overwrite the active entry fields or you can enter
data in the empty fields.
 You can branch to screens for general transaction
management, to make changes there if necessary, via the
Tab pages.
Transaction Settlement

 Using the Settle fixed-term deposit function, you can mark the
transaction to document that it has been processed in the back office.
 This activity precedes the correspondence to be created in the next
step.
Correspondence
1. Deal Slip
2. Confirmation letter to external
party Partner’s Standing Instructions for
Correspondence

Counterconf. required?

NO YES

Print only correspondence Print corresp. & counterconf.

Collective Processing
User-defined
variants

 This function helps process several transactions on from

one screen,
 You can use selection criteria to choose the transactions
you want to process or display,
 From this processing list, you can branch directly to the
individual transactions at any time,
 When you have finished processing a transaction, a
Processing indicator appears.
Accounting Functions

 In the accounting area, you process the relevant account-

based activities in the sub-ledger and transfer posting
information to the general ledger in Financial Accounting,
 You can perform the following transactions:
 Postings,
 Payments.
 Reversals
 Accruals & Deferrals
 Valuation.
Posting Logic
 Postings from Treasury to FI are based on the:
 flow types in payment details,
 the account assignment reference that belongs to the financial
transaction
 You can post individual flows either via GL accounts or via
customer accounts.
Posting a Transaction

% FT Deposit 1 month 4.5 Position Indicator : 91010

Fixed term deposit 110100 Clearing a/c for 110100 Interest Earned
payment requests
Treasury: Post Flows
Transaction TBB1

 Flows in TR can trigger postings to FI.

 You can carry out a Test run in order to check the accuracy
of the posting specifications in the posting log.
 When the posting run takes place, the transfer of the flows,
and the posting of information to FI, takes place. The
relevant documents are then to be generated.
 If the flow cannot be posted, the report shows an error
message.
 Post Accrual / Deferral

Date for posting &

Choose Area reset operations

Posted Accruals /
Deferrals
Foreign Exchange, Derivatives
Foreign Exchange Product Type
Transaction and Position Management Process
Reasons for Using Parallel Books

 Legal requirements.
 Comparability
Standard accounting principles enable benchmark comparison
between companies
 Consolidation.
 Globalization
Valuation Areas

 Valuation areas are

created to manage
positions in parallel on
the basis of GAAP.
 Valuation and posting
rules that are required as
per legal requirements
can be defined in these
valuation areas.
 Transactions that are
entered in transaction
management of the
various treasury modules
are then distributed to
various parallel areas.
Assign Accounting codes and Valuation Areas

 The respective valuation areas are assigned to the TR

accounting codes. In this way, the valuation areas are
defined implicitly for each company code.
Valuation Classes

 Valuation class has two characteristics

The general valuation class serves as an indicator for the
trader as to where the position is to be assigned.
The balance sheet for the relevant parallel valuation area
is structured based on the valuation class.
 The valuation classes are dependent on the valuation
area since different accounting rules allow different
classifications. Examples of valuation classes include
fixed assets, current assets (HGBGermancommercial
code), or also held-for-trading or available-for-sale (IAS).
Position Management Procedure

 Define Valuation Procedure ( rate valuation procedure for

forward exchange transactions)

 Define position management procedure

 Assign position management procedure

Position Management Procedure (Contd)

 Determines how positions are managed and valued in the

parallel valuation areas.
 To comply with the legal requirement of the relevant
accounting rules, necessary procedures needs to be
defined to carry out key date valuation.
 You then set the sequence of the key date valuation
procedures within the position management procedures. In
this way, you can combine the relevant procedures for
amortizations, one-step price valuations, security price
valuations and foreign currency valuations according to the
respective accounting rules.
Define Valuation Procedure

 Example: Rate valuation procedure for forward exchange transaction

FX spot rate on the market against spot rate in the transaction
Write-down rule: (Unrealized losses):
- Write-down to market value
or - Write-down to purchase value
or - No write down

Write-down rule: (Unrealized losses):

- Write-down to market value
or - Write-down to purchase value
or - No write down
 Key Date Valuation

 The key date valuation is carried out on the basis of the position
management procedure that is determined for the relevant position.
3 options for key date valuation are available :
 Year-end valuation (without reset)
This key date valuation without reset is used in the context of annual
accounting. Key date valuation permanently changes the book value of
the position.
 Mid-year valuation without reset
 Mid-year valuation with reset
This valuation category is used for monthly or quarterly accounts. The
results of the valuation are reset on the same date as the key date
valuation. The key date valuation with reset, therefore, does not
change the position permanently, but only for the period between the
valuation key date and the reset key date.
 In the case of a valuation with reset, the reset occurs and is posted in
the same run as the valuation.
The reset key date is one day after the valuation key date.
Key Date Valuation
Valuation Log
Derivatives
Product Matrix – Derivatives
Controlling Exchange Rates risk via OTC Options

 OTC Currency options

 Currency Barrier options
 Compound options
Controlling Exchange Rates risk via OTC Options

 Using an option provides the flexibility to both reduce the risk of loss
and at the same time to profit from favorable market trends. Options
represent a type of insurance, therefore, and a premium is paid for this.
 The use of currency options is recommended when there are strong
exchange rate fluctuations or when future expectations are very
uncertain.
 OTC currency options can be assigned to both foreign exchange
trading and to the area of derivative financial instruments, and can be
created in both areas.
 OTC currency options are asymmetric hedging instruments since
rights and obligations are split unevenly between purchaser and seller.
In contrast to listed instruments, the OTC options with user defined
structures are traded directly between business partners.
OTC Currency options

t0 t0+2 ti ti+2

1. At t0 the transaction is concluded (creation and

settlement)
2. At t0+2 (value date) the premium is paid (posting of
premium flow)
3. At ti : Physical exercise and exercise settlement
( transfer posting of the premium flow). The spot
transaction is generated at the same time.
4. At ti+2(value date) the posting of the spot transaction
occurs.
Currency Barrier Options

 Currency barrier options are different from regular OTC

options in that they have a defined upper and lower limit
(instrike or outstrike). If these limits are exceeded or fallen
short of by the market, the option either becomes effective
or expires – depending on the option type. This barrier is
specified in the financial transaction data.
Control of Interest Rate risks via derivatives

 Forward Rate Agreement (FRA)

 Interest Rate Swap
 CAP/FLOOR
Forward Rate Agreement (FRA)

 Agreement between two contract parties (Buyer and seller)

- On a certain interest rate (FRA rate)
- For a deposit or loan
- For a period in the future
 Objective: Fixing of an interest rate today to apply to a period in the
future
 Term : 3 – 24 months
 Reference interest rate e.g. LIBOR 3 mths, LIBOR 6 mths
 Interest rate comparison (fixed rate against reference interest rate) after
lead time
 Calculation of settlement amount to be paid
 Interest netting in the form of cash settlement, no exchange of nominal
amounts
FRA (Continued)

 The buyer of a FRA anticipates higher interest rates for the

reference period, while the seller anticipates lower interest
rates.
FRA (Continued)
1 2 3 4

t0 t8-2 t8 t11

1. At t0 the transaction is concluded (Input and settlement)

2. On fixing day = Start of hedging period – 2 days (from
the definition of the reference interest rate) (Carry out
interest rate adjustment)
3. Start of hedging period and payment of the discounted
settlement amount (postings of the flows) .
4. End of hedging period.
FRA (Example)

 A company will receive EUR 10M in 6 months and it wishes to invest

this as 3-month money. The company expects falling interest rates.
Therefore, at time t0 the company agrees an FRA with the bank for
EUR 10M. The FRA will start in 6 months (t8) for a term of 3 months
until (t11). The agreed interest rate is 5%; 6 months later (Fixing day =
t8 minus 2 days):
 The reference interest rate (3 months LIBOR) is 4.5%. Therefore, the
bank is obliged to pay the company a settlement of EUR 10M x 0.5% x
90/360 = EUR 12,500 (this amount is still to be discounted).
 If the interest rate on the fixing day had been higher than the agreed
interest rate of 5%, the company would have had to pay a
corresponding settlement. This is because the FRA is a symmetrical
financial instrument.
Swaps

 A swap is an exchange of cash flows over a fixed period of time.

 You define the cash flows when you conclude the swap,
 but their absolute value may depend on events in the future
 (e.g. interest payments at variable interest rates which
 depend on future reference interest rates).
 Depending on the type of cash flows to be exchanged, we
differentiate between:
- Interest rate swaps and
- Cross-currency interest rate swaps
Possible variations for exchange of interest payments:
PAYER: Outgoing interest payments are fixed, incoming interest
payments are variable
RECIPIENT: Incoming interest payments fixed, outgoing variable
BASIS: Variable vs variable interest payments
FIX TO FIX: fixed vs fixed interest payments
Cap/Floor

 CAPs/Floors are a series of interest options that you

can fit to the periods/term of the transaction that you
want to hedge.
 CAP: Agreement between the seller and buyer of the
Cap. The seller agrees, in the case of a rise in the
reference interest rate above the agreed fixed interest
rate (Strike), to pay the difference in the interest rates
to the holder of the Cap. If the agreed interest rate is
fallen short of, a settlement payment is not made.
 FLOOR: The purchaser only receives a settlement
payment if the agreed interest rate lower limit is fallen
short of.
Securities Management
Securities Management

 Securities Management enables you to manage your

securities transactions and positions.
 The various stages of the transaction and position
management process are included in the trading, back
office and accounting areas.
 You must maintain the relevant master data before you
can use Securities Management.
 Dividends, interest, repayments, corporate actions,
etc. are processed through the position management.
 Master Data

You create master data for the following areas:

 Business partner:
In addition to the minimum data entries (name and address) in the
master record, you have to define the role of the business partner.
 Class:
You have to enter master data for each security managed in the
position. This is a prerequisite for any position changes in the trading
and back office areas. Class master data contains the product specific
conditions and all the general structure characteristics for securities.
Other entries include, for example, the exchanges for this security.
 Securities account:
You manage and administer securities positions in securities accounts.
 Position indicator:
You define the parameters for position management and valuation in
the company code for each security by securities account.
Classes

 Each security traded on the capital market is described

specifically by its class. Class master data contains all the
characteristic security data that remains the same
irrespective of the transaction.
For example, the stock type (preference stock) or the stock
form (old stock) are defined for class SAP Common Stock.
The issue start, the due date, and the interest structure
are defined for class 6% Government bond
 Each class is entered under an ID number that uniquely
identifies the security.
Class Master Data and Product Types

 Each traded security is created with a unique ID number as

a class master record by assigning it to a product type.
Securities Management
Corporate Actions: Overview

 The following activities in the Corporate Actions area can be

represented:
Stock splits, stock swaps, capital reductions, capital increases from
retained earnings, transferring new stock, posting subscription rights,
converting issue currency, other corporate actions.
 Corporate actions are defined centrally for all company codes.
After having activated the corporate actions, you can perform posting in
every company code in which you manage positions belonging to the
securities affected. From there, you update the securities positions and
generate FI documents, if required.
 You must also create the position indicators for all securities/securities
accounts affected.
Capital Increase

 In the case of a capital increase, existing stockholders have the right to

obtain new stocks in proportion to the number of stocks they currently
hold. This enables existing stockholders to maintain their share of
voting rights and compensates for any negative price trend resulting
from the capital increase.
 The subscription right ratio indicates how many subscription rights are
attached to an old stock. One old stock usually has one subscription
right (ratio 1:1)
 The subscription ratio indicates how many subscription rights you need
to obtain one new stock.
Example: Capital increase from 50M EUR 60M EUR. corresponds to a
ratio of 50:10 or 5:1.
5 existing stocks to 5 subscription rights to 1 new stock.
Theoretical Value of Subscription Rights

The theoretical value of the subscription right is determined using the above
:formula
Ka: current exchange price of the old stock
Kn: subscription price of the new stock
m: old capital
n: amount of capital increase
m/n: subscription ratio
 Old stock marked down by value of subscription

Markdown = Subscription right value X Old Stock book value

Old Stock Mkt. price

You convert the theoretical value of subscription rights for

the subscription right markdown to the book value of the
.position in old stocks (value for accounting purposes)
Market Risk Analyzer
What is Market Risk ?

Value/Finance Area

Revenue Risks Liquidity Risks

Refinancing
Market Risks Credit Risks

Date
Interest rate Default Risks

Currencies Country Risks

Stock Prices Settlement

What is Market Risk ?

 Risk is the probability of loss from a financial transaction.

 The risk of a financial transaction is called a market risk
when it results solely from changes in market parameters
(interest rates, stock prices, currency exchange rates,
volatilities, and so on).
Risk Controlling Process

 In identifying risks, the next topic is which risks exist and

which risks should be included in risk management. In
identifying risks it helps to understand that risks have a
cause and an effect (such as changes in value and
revenue) on a certain object.
 After you identify the risks, the next step is to decide which
of the identified risks to analyze and which key risk figures
to calculate.
 Risk management focuses on limiting taking undue risks
and distributing the sum of risks taken optimally among the
individual sources of risk.
Price Parameters

 To evaluate transactions in risk analysis, you must fill

out market data tables in the SAP system.
 You can do this in the following ways:
Manually
Excel interface
File interface
Datafeed
FTP access (Internet)
Datafeed server
Reference Interest Rates

 To store market interest rates in the system, the Reference interest rates in
the system needs to be created.
 You can define reference interest rates in the system that correspond to the
parameters above. You can define as many reference interest rates in as many
currencies as you like.
 The reference interest rates are defined by currency, interest calculation
method (such as 360E/360,Act/360), quotation type (such as bid or ask), term,
and yield type.
 The definition of the forward calculation of the curve type is especially
significant for risk analysis. When you assign an interest rate to a yield curve,
you define what interest rate structure is used to calculate forward interest rates
in case that interest rate is used as the reference interest rate in products such
as floating rate bonds, swaps, or caps. Then you can decouple the calculation
of the forward interest rates from the curve that is used as a basis to calculate
the zero bond discounting factors.
 The reference interest rates compose the supporting points of the yield curves
of various currencies. The reference interest rates also are assigned to Yield
curve types.
Yield Types

 You can define par yield curves from securities with all-year coupon
payment (securities having this coupon yield are quoted at par). Zero
bond yields are derived with finance mathematics from the par yield
curves (bootstrapping). Zero bond discount factors are calculated from
the zero bond yield curves and are used to discount the payment flows.
Yield Curve Type

 Yield curve types are described by attribute yield type, read and interpolation
procedure, and many currencies. For each yield curve, the yield curve types
have a support point structure that the yield curves are formed upon.
 A yield curve is constructed from the reference interest rates and support
points that exhibit the following commonalities:
Reference interest rates are assigned to the same yield curve type
Reference interest rates are defined for the same currency.
 On the basis of this information, the expanded yield curve/interest table is
constructed and contains the following values:
The interest rates of the support points
The interpolated interest rates of the annual support values (for par rate yield
type only)
Zero coupon rates and zero coupon discounting factors of the support points
and the annual support values for par rate yield type.
 The interest calculation methods of the yield curves and the reference interest
rates may be different. When the set interest rates in the expanded interest
table are saved, the conversion to the interest calculation methods of the yield
curves occurs.
 For enabled continuous compounding zero interpolation, zero rates with
continuous interest calculation and the Act/365 interest calculation method
are calculated from the zero bond discounting factors regardless of yield type.
Volatilities

 The system enables you to define types of volatility. Each option type is
assigned a certain type of volatility (such as the currency volatility for a
currency option). If you expand this concept, you also can define
volatilities independently from their defined assignments.
 In addition, the system can define and calculate volatilities that are
used for determining variance/covariance for value-at-risk evaluations.
Statistics Calculator

 You can use the statistics calculator to calculate volatilities

and correlations that are needed in calculating variance
/covariance. You also can enter these values externally.
Market Data Shifts

 Market data shifts enable you to check the NPV changes of

items under conditions with simple changes. Market data
shifts are used only in NPV reports and to define scenario
paths in asset liability management.
Scenarios

 Market scenarios provide the opportunity to alter the

underlying market parameters. Then you can model the
yield curves with graphic aides. In addition, you can define
changes in volatility, exchange rates, or securities prices in
the market data scenario. You can put historical market
data into scenarios and manipulate it.
Analysis Structure

 The analysis structure contains all attributes that can be

used as characteristics of a transaction for analysis
purposes.
 These attributes include default characteristics such as
company codes, product types, portfolios, and others, as
well as characteristics defined by the customers
themselves.
 The analysis structure is defined across all clients.
 The analysis structure is enabled client-to-client.
 The portfolio hierarchy is defined based on the analysis
structure.
Creating an Analysis Structure

Create and maintain Derive

characteristics characteristics

1 3

Create and maintain Define values of

2
analysis structure characteristics
Characteristics and Analysis Structure
Example of Balance Sheet Reporting View

 A structure can be created that it makes it possible to

differentiate between assets and liabilities in relation to the
transactions on the balance sheet.
Evaluation Types
NPV Calculation

 Marking to market means valuing a position at the price that can

currently be attained on the market. "What price will I achieve if I close
out the position?" For long positions this means determining the
achievable disposal price. For short positions it means determining
the repurchase value.
Monte Carlo Simulation

 The Monte Carlo simulation, like the historical simulation, is a simulation

method used to determine a frequency distribution of potential value changes.
However, in contrast to the historical simulation which uses historical data to
create changes in portfolio value from the changes in market price, the Monte
Carlo simulation uses a stochastic process. The random numbers needed are
created with a random number generator.
Credit Risk Analyzer
Limit System

 SAP's Credit Risk Analyzer incorporates central limit

management functions, enabling to set limits for
counterparty default risk and monitor them online. The
system can calculate the settlement and default risks
arising from the activities on the financial and capital
markets, as well as classical credit risks. By defining
differentiated upper risk limits, you can restrict potential
losses on financial transactions as a result of business
partner insolvency. In the same way you are able to have
control over traders by using a system of limits.
Types of Risk

 Credit risk subdivided into

 Classic credit risk (Counterparty risk/issuer risk)
 Counterparty risk from the trading book from trading transactions
plus a term-related and risk-related addon for covering potential
positive changes in market value

 Settlement risk subdivided into

 Direct settlement risk
exists for the duration of the period between an advance
payment/ delivery being made and a return payment/delivery
being made
 Return payment risk
 The Default Risk and Limit System

 The default risk and limit system support the quantification of

various risk positions and default risks in line with the current market
position. The risk exposures (attributable amounts) from the
individual transactions then are compared with the centrally-defined
limits.
 The exposures are calculated as part of end-of-day processing, and
can be updated during the day using the integrated default risk limit
check. This means that traders can use the integrated limit check
before concluding each transaction to determine online the
exposure linked to the financial transaction. They then can let the
system check this exposure against limits stored centrally in Limit
Management. Once the transaction has been concluded, the
exposure automatically increases the utilization of the affected
limits.
Requirements for Limit Management

 Multiple views definitely could exist in credit risk

analysis. Possible views might be, for example,
internal/external views or different exposure views into
which one transaction can flow with different
attributable amounts. That would make it possible to
determine attributable amounts for the same
transaction in the different risk views via different
formulas
Determination Procedure

 A determination procedure covers all rules and definitions that are

necessary, in relation to transactions with default risk, to determine
Risks related to a certain risk type
From a certain business perspective
 This definition is explained as follows:
If credit and settlement risks are determined for a transaction, two
determination procedures must be defined (one determination
procedure per risk type).
 I f you want to evaluate a transaction by different methods, you do
so using different determination procedures. You can evaluate a
transaction from the perspective of supervisory law as well as
internal risk in parallel.
 Within a determination procedure you can evaluate various
transactions having different risk properties.
Default Risk Rules

Default risk rules are determined automatically when

a transaction is determined
Attributable Amount Determination
 Formulas for determining attributable amounts

Possible formulas for determining attributable amounts

= Nominal value
= NPV
= NPV+(Nominal value*AddOn)
= NPV+(NPV*AddOn)
= Nominal value*Probability of default
= NPV*Probability of default
= NPV+(Nominal value*AddOn)*Probability of default
= Nominal value*Recovery Rate
= NPV*Recovery Rate
= NPV*Recovery Rate*Probability of default
= (NPV*AddOn)*Recovery Rate*Probability of default
= (Nominal value*AddOn)*Recovery Rate*Probability of default
= NPV+(Nominal value*AddOn)*Recovery Rate*Probability of default
= Return payment amount – Advanced payment amount
= ......... Other standard formulas
= Individual formula structures using a user exit
* AddOns are dependent on market value change period of a transaction
* Recovery Rates are derived as percentage addons from the business partner rating and the
risk commitment period of
the transaction
* Probabilities of default are derived from the risk sensitivity of a transaction
Limit Types

 The limit type is the key limit management instrument. You

must first define limit types in the system settings before
you can create limits and calculate the corresponding limit
utilizations.
 Limit types define the depth of a risk view (or of a
determination procedure.)
 One limit type always is assigned to a determination
procedure.
 That limit type always is valid for a particular risk view
where the attributable amounts are compared against a
limit specification.
 You can define multiple limit types as part of one
determination procedure (the relationship is 1:n).
Maintaining Limits

No more transactions may be concluded with Citibank

.in company code 9101 that exceed a volume 1600000000
Limit Utilizations
Release Procedure

 Limit release according to the dual control principle

 Two different users
 Changes move the release back one step
not released (Status 0)
flagged (Status 1)
released (Status 2)