Function documentationCommodity Forwards Locate this document in the navigation structure

 

Forwards (or forward contracts) are unconditional forward transactions. In contrast to spot transactions, in which physical delivery immediately follows an obligation (buying/selling a particular quantity of an underlying at a predefined price), forward transactions postpone delivery until a future date.

The difference between futures and forwards is that in contrast to forwards, futures are traded on an exchange. Forwards are therefore more flexible than futures.

A commodity forward contract has a particular underlying commodity.

Forwards can either be settled by physical delivery or by cash payment. Commodity forwards in the Transaction Manager can only be settled in cash.

Cash settlement involves a payment being made on the transaction due date. This payment corresponds to the difference between the agreed forward price and the current market price of the commodity upon maturity.

  • If the spot price is below the futures price, the term 'contango' is used.

  • If the spot price is above the futures price, the term 'backwardation' is referred to.

Prerequisites

To enter commodity forwards, you first need to make the required settings in Customizing for the Transaction Manager:

  • You must define the following settings for these in the IMG

    • Define product types

      The creation of financial transactions and management of positions in the Transaction Manager is based on product types.

      To create product types in Customizing, choose   OTC Derivatives   Transaction Management   Product Types.  

      Select the Commodity Forwards tab page and then New Entries.

      • Assign the product type a key (80C, for example).

      • Assign the product type a long text up to 30 characters and a short text no longer than 10 characters.

      • Product Category = 800 Commodity Forward

      • Settlement = cash settlement (default)

      • Save your entries.

    • Settings for transaction management

      • Enter a number range for the transactions for each company code by choosing   Transaction Types   Number Range   Define Transaction Number Ranges.  The system uses this number range to assign a transaction number when you create a transaction.

      • Choose   Transaction Types   Define Transaction Types   to create at least one transaction type for transaction category 100 Purchase and one for transaction category 200 Sale.

        In addition to assigning the transactions a number range, you can also assign a processing category here. You can use the processing categories 00101Contract - Settlement and 00102 Contract Without Settlement.

      • Create the transaction flow types for transaction management (IMG activity: Define Flow Types for Transaction).

        Examples:

        1004 Purchase: Commodity Forward for flow category: 50 Purchase

        2004 Sale: Commodity Forward for flow category: 51 Sale

        1900 Charges for flow category: 90 Other Flow/Condition

        1310 Cash Settlement for flow category: 31 Cash Settlement

      • Assign the required flow types to each transaction type. You must include all the flow types needed to process a transaction. (IMG activity: Assign Flow Types to Transaction Type).

      • Make the settings for internal and external confirmation letters in the Correspondence section. You define the possible correspondence types in the IMG activity Define Correspondence Types, and specify which documents you want to generate for each transaction type and activity category in the step Define Correspondence Activities.

      • Define the relevant update types and assign them to the corresponding transaction types in the Update Types section:

      • You define account determination for the update types in Customizing for the Transaction Manager. To do this, choose   General Settings   Accounting   Link to Other Accounting Components   Define Account Determination  .

      • You must have created general valuation classes in Customizing for the Transaction Manager. Choose   General Settings   Accounting   Settings for Position Management   Define and Assign Valuation Classes  .

        A general valuation class must be assigned to each transaction. You can define default values for the general valuation class assignment in Customizing by choosing   OTC Derivatives   Transaction Management   Assign General Valuation Class  .

  • Make the required settings for the commodity master data by choosing   Transaction Manager   Listed Derivatives   Master Data   Commodities  . See also: Commodity Master Data

  • Settings for managing positions for commodity forwards

    • To determine the steps to be taken and the order in which they should be carried out for the key date valuation and the determination of derived business transactions, choose   Transaction Manager   General Settings   Accounting   Settings for Position Management   Define Position Management Procedure  and Assign Position Management Procedure. You then create a position management procedure for the position management category OTC Derivatives.

    • Assign the update types required for valuation based on the position management procedure by choosing   General Settings   Accounting   Settings for Position Management   Key Date Valuation   Update Types   Assign Update Types for Valuation  .

    • Assign the update types required for the derived business transactions, taking into account the position management procedure. To do this, choose   General Settings   Accounting   Settings for Position Management   Derived Business Transactions   Update Types   Assign Update Types for Derived Business Transactions  .

  • To make the settings required for posting the relevant update types to Financial Accounting, choose   General Settings   Accounting   Link to Other Accounting Components  .

Once you have made the necessary settings in Customizing, you need to specify the master data required for entering the financial transactions:

  • Enter the required business partner data. In the Derivatives area, the business partner must be in the Counterparty role.

  • Define the commodity master data that you require in the application. See also: Commodity Master Data

Features

  • You can enter purchases and sales for a commodity forward.

  • You can change and reverse existing financial transactions, as well as display their history.

    See also: Edit Financial Transaction

  • You can also generate correspondence for the financial transactions according to your Customizing settings.

  • Existing commodity forward purchases and sales can be valued using the Key Date Valuation.

  • Upon maturity of the commodity forward, the payment is settled in cash.

Activities

Entering a Commodity Forward

  1. In the area menu, choose   Treasury and Risk Management   Financial Risk Management for Commodities   Trading   Create Financial Transaction.  

  2. Enter the Company Code, Product Type, Transaction Type, and Partner, and then choose Create.

  3. On the Structure tab page, enter the following data for the transaction:

    1. Enter the Commodity ID.

    2. Enter the quantity/unit, price/unit (= the agreed forward price), spot price (spot rate), contango/backwardation, forward date, and payment date.

      Under Amount, the payment amount from these entries is displayed.

    3. The Settlement area contains the Cash Settlement pushbutton. Cash settlement is determined upon maturity of the forward transaction.

    4. In the Contract Data area, you can enter the contract date, business partner, traders, and external reference.

  4. Enter the required data on the other Tab Pages

  5. Save your entries.

Cash Settlement

  1. If you want to use cash settlement, use Change Financial Transaction.

  2. On the Structure tab page in the Settlement area, choose the Cash Settlement pushbutton.

  3. Enter the spot rate valid on the payment date in the spot price field. The system then calculates the settlement amount and displays it in the Amount field. You can change both the amount and the amount currency.

  4. Save the financial transaction.