Commodity OTC Options

OTC deals are the result of discussion and negotiation between two parties, without the intervention and/or regulation of a market-exchange. The terms and conditions of the trades are completely deal-specific and are formalized by a legal document called the confirmation document.

A commodity OTC option is a special kind of OTC option with an underlying commodity forward. In OTC option, the buyer of an option has a right but not an obligation to buy or sell the underlying commodity at a fixed price called the “Strike price”. All Options have an expiry date that defines the time in which the right has to be exercised.

A put is an option to sell at fixed price. The buyer of a put has the right to sell the underlying commodity.

A call is an option to buy at fixed price. The buyer of a call has the right to buy the underlying commodity.

Prerequisites

Before you can enter your commodity OTC options, you must ensure that you have correctly defined your commodity forwards. See also Commodity Forwards.

When you have defined your commodity forwards, you need to make the required settings in Customizing for the Transaction Manager to define the commodity OTC options.

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. Define Product Types
  
  Select the OTC Options, Forwards tab page and then New Entries.
  - Assign the product type a key (76A, for example).
  - Assign the product type a long text up to 30 characters and a short text no longer than 10 characters.
  - Product Category = 760 OTC Options
  - Assign a Number range
  - Settlement = cash settlement (default)
  - Select the underlying Product Type and Transaction Type. These are the commodity forward defined earlier.
  - 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 Number Ranges for Transaction. 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).
    Examples:
    
    1900 Charges for flow category: 90 Other Flow/Condition
    
    1300 Option Premium - Profit/Loss for flow category: 30 Option Premium
    
    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. For example, flow categories 30 and 31. (IMG activity: Assign Flow Types to Transaction Type).
  - Define the relevant update types and assign them to the corresponding transaction types in the Update Types section. For example, DE1300+ (Option Premium inflow), DE1300– (Option Premium outflow), DE1310+ (Cash Settlement inflow), DE1310– (Cash Settlement outflow)
  - 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 OTC options:
- 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 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 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 .

Features

You can enter purchases and sales for a commodity OTC option.
You can display, exercise, expire, 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 OTC option purchases and sales can be valued using the Key Date Valuation.
Upon maturity of the commodity OTC option, the payment is settled in cash or physical exercise.

Activities

Entering a Commodity OTC option

In the area menu, choose Treasury and Risk Management Financial Risk Management for Commodities Trading Create Financial Transaction.
Enter the following details:
- Company Code
- Product Type
- Transaction Type
- Partner
Choose Create.
Open the Structure tab page.
Complete the Exercise and Premium areas.
Open the Underlying tab.
Enter the information for the Commodity Forward:
- Commodity ID
- Quantity/Unit
- Price/Unit
- Spot Price
- Forward Date
- Payment Date
Enter the required data on the other Tab Pages.
Save your entries.