Derivatives

Purpose

The Derivatives component covers the entire transaction process, which includes FRAs and trading with OTC options, swaps, caps/floors, foreign exchange and listed options and futures. This process spans the whole trading process, starting from entering the transaction, processing it, and transferring the data to Financial Accounting .

Integration

Derivatives play an important role in interest and currency management. To manage risk, it is essential that you first analyze the current situation based on up-to-date market data. This requires an aggregated examination of underlying transactions and associated hedge transactions on a comparable basis. For derivatives, and options in particular, this results in the instruments are represented as delta equivalents. Consequently, the risk analysis and the decision making process only includes the volume of all the positions examined that is actually subject to market fluctuations. In addition to analyzing the exposure and the market values, you also need to take the special nature of derivatives into account when reviewing your liquidity situation. In contrast to the classical financial instruments, derivative instruments generate cash flows that have an element of uncertainty (either the amount is uncertain or the amount and the likelihood of occurrence are uncertain) in addition to 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 an advantage. In the Trading area, an option price calculator helps you calculate prices.

Features

Trading

The trading area groups together the functions for entering derivatives transactions. It also enables you to also call up information about existing transactions or make changes at a later date. Collective processing functions are available to help you manage your foreign exchange transactions efficiently.

The product types in the Derivatives area are:

OTC interest rate instruments

  • Swaps

    • Interest Rate Swap

    • Currency swap

    • Discount swap

    • Compound swap

  • Forward rate agreement (FRA)

  • Cap/floor

    OTC Options

  • Currency option

  • Currency barrier option

  • Swaption

  • Interest rate guarantee (IRG)

  • Security options

  • Compound Option

  • Average Rate Option

  • Basket Option

  • Correlation Option

Repurchase (Repo) Transactions

Listed transactions

  • Listed options and futures

Securities lending

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

Back Office

Once you have entered financial transactions in the trading area, you settle the transactions in the back-office area. The back office area also contains functions for checking and changing the transactions. The key aspects of postprocessing are:

  • Entering additional transaction data, in other words, adding information that is relevant for back-office processing

  • Preparing for posting and payment (for example, by checking the accounts used)

  • Generating correspondence in the form of internal or external confirmations.

Collective processing functions are also available in the back office. The back-office also includes functions for netting transactions and for entering or editing references .

Accounting

Once you have entered the transactions in the Trading area and checked and completed them in the Back Office area, you then submit them to accounting. The accounting area includes functions for transferring data to Financial Accounting , such as posting reports or position management postings. It also includes functions for parallel valuation.

Master data management

Financial transaction processing in the Transaction Manager is based on master data.

Information system

The information system provides a range of reports for analyzing your money market transactions. The Money Market Information System is part of the Transaction Manager Information System, which offers analyses and evaluations across the whole of the Corporate Finance Management dataset.

The link to the SAP drilldown reporting tool and SAP Query also allows you to define your own reports in addition to those provided by SAP.

See also:

Information System