Definition

A commodity option is a listed option on a future and on the relevant commodity.

Example:

A November option on soy beans is an option on a futures contract for the delivery of soy beans in November.

In this sense, it is an option on a future rather than on the physical goods.

Prerequisites

To enter an option on commodity futures, you first need to make the required settings in Customizing for the Transaction Manager :

Define product types

Creating financial transactions and managing positions in the Transaction Manager are based on product types.

To create product types, in Customizing for Financial Supply Chain Management, choose Treasury and Risk Management ® Listed Derivatives ® Transaction Management ® Product Types.

You then need to specify a number range under Define Number Ranges for Listed Options/Futures Class Data .

Choose Listed Derivatives → Define Product Types to specify a product type for the Option on Commodity Futures for product category750 Listed Options

In the Class area, enter the following:

Number range for the class

Category = Option on commodity futures

Quotation type =quoted in percent, directly, or in points

Settlement =cash settlement

Exercise type =European or American

In the Margin area, define the following:

Settlement method: future style

Rate type for variation margin : Define the rate type that is to be used to determine the rate in the variation margin calculation.

In the IMG activity Define Field Selection for Class Data, you can define which entry fields should be displayed and appear as optional, required, or display fields.

Settings for transaction management

In Customizing for Listed Derivatives , enter a number range for the transactions for each company code by choosing Define Transaction Number Ranges. The system uses this number range to assign a transaction number when you create a transaction.

Choose Define Transaction Types to create for each product type the purchase and sales transaction types required for the transaction categories 400 Open transaction and 500 Close transaction .

See also: Open Transaction and Close Transaction

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

Examples:

1302 Option premium – Position for flow category: Option premium

1500 Purchase options/futures for flow category: Purchase

1510 Sell options/futures for flow category: Sale

1900 Charges for flow category: Other flow/condition

1950 Initial margin options/futures for flow category: Other flow/condition

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) .

You can define rules for generating flows automatically (such as tax flows) in the IMG activity Define Derivation Procedures and Rules .

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 the account determination for the update types in Customizing for the Transaction Manager. 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. To simplify transaction entry, you can define default values for the general valuation class assignment. In Customizing, choose Listed 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 position management of options on commodity futures

Make the settings that are required for margin management by choosing Listed Derivatives → Position Management → Futures Account Management → Update Types:

Choose Specify Update Types for Futures Account Management to determine a value type for the update types. The value type determines how the update type affects the position value. You can select the following values:

- Outflow position value options/futures

- No position changes

- Inflow position value options/futures

Note:

When calculating the variation margin, the position value is compared with the current market value of a position, and a flow may be generated with an amount that corresponds to this difference.

You assign the update types for the variation margin and close margin flows under Assign Update Types for Margin Management for Each Product Type. These update types are required for the functions Post Variation Margin Post Close Margin, and Matching Long and Short Positions

Make the settings that are required for margin management by choosing Listed Derivatives → Position Management → Futures Account Management → Update Types:

Choose Specify Update Types for Futures Account Management to determine a value type for the update types. The value type determines how the update type affects the position value. You can select the following values:

- Outflow position value options/futures

- No position changes

- Inflow position value options/futures

Note:

When calculating the variation margin, the position value is compared with the current market value of a position, and a flow may be generated with an amount that corresponds to this difference.

You assign the update types for the variation margin and close margin flows under Assign Update Types for Margin Management for Each Product Type. These update types are required for the functions Post Variation Margin Post Close Margin, and Matching Long and Short Positions

Positions for Listed Options and Futures are defined by the following criteria:

Valuation area

Special valuation class

Accounting code

ID number

Futures account

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

Choose one of the following settings:

Position management category = Listed options (future style) and futures.

Under Liabilities / Assets, you can select the management of assets and liabilities balance sheet account 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 derived business transactions based on the position management procedure by choosing Transaction Manager → General Settings → Accounting → Derived Business Transactions → Assign Update Types for Derived Business Transactions.

On the Profit and Loss Record tab page, you also define the update types for the variation margin flows.

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 Listed Derivatives area, you require business partners in the following roles:

Issuer

Depository bank

Counterparty

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

Specify the required Futures Accounts and the corresponding Position Indicators .

Use

You can buy and sell options on commodity futures.

You do this in transaction management under Trading and Back Office .

See also: Edit Financial Transaction and Edit Listed Options and Futures

You can use the margin management area to output the daily profit and loss statement of open items (settlement method: future style ).

You can valuate options on commodity futures using the key date valuation .

Procedure