The Derivative Financial Instruments component covers the entire business process including FRAs and trading with OTC options, swaps, Caps/Floors, foreign exchange and options and futures. This process starts when you enter the transaction, through processing, to transferring data to Financial Accounting.

Derivatives play an important role in interest and currency management. For Risk Management, you must firstly carry out an analysis of the current situation based on current market data. This requires that you look at the aggregate of basic transactions and associated hedging transactions on a comparable basis. For derivatives, and options in particular, this results in the instruments being represented as delta equivalents. As a result only, only the volume of the viewed positions which is actually subject to market fluctuations is included in the risk analysis and the decision making process. In addition to analyzing the exposure and the market values, you need to take account of the special nature of derivatives when reviewing your liquidity situation. In contrast to the classical financial instruments, derivative instruments generate cash flows which have an element of uncertainty (either the amount is uncertain or the amount and the likelihood of occurrence are uncertain) in addition to the fixed cash flows. In Market Risk Management, you can display and simulate these cash flows (variable payments of a swap, options). As derivatives are dependent on variable financial market values such as reference interest rates, access to realtime datafeed which provides up-to-the minute market price information is advantageous. In the Trading area, an option price calculator helps you calculate prices.

The product types in the Derivatives area are:

• Swaps
• Interest rate swap
• currency swap
• Forward rate agreement (FRA)
• Cap/Floor

• Currency Option
• Currency barrier option
• Swaption
• IRG (option on FRA)
• Security option
• Compound option

• Listed options and futures.

The following graphic shows how the various Derivatives components relate to one another:

To enter the Derivative Financial Instruments component: