Market Risk Management 

Purpose

The analytical capacity of the SAP Market Risk Management (MRM) component meets the demands placed on a modern risk management system. You can quantify and analyze your market risk by using comprehensive position and risk evaluations based on either current market data and actual positions or simulated market data and fictitious financial transactions.

Several methods and procedures are available: You can run a mark-to-market valuation to determine the current market value of your operative business transactions and financial transactions and to calculate future values and the differences to market values. The effective price and effective interest rate functions give you performance figures for a selected position. Key risk figures allow you to assess the extent of your risks and your ability to respond to the market parameters that affect prices. They include value at risk (VaR), risk exposures and interest rate and option sensitivities. In the cash flow view you can see all the cash flows resulting from your operative business and financial transactions (including flows from options and instruments with variable interest rates).

The results of the various evaluations are available as standard reports that you can use as a basis for decision making for risk control. You can also create your own reports using the SAP drilldown reporting function.

Prerequisites

Controlling market risks is a complex process involving data collection, risk measurement, risk analysis and risk simulation as well as making decisions on the use of financial instruments. This process has to work in unison with other treasury and corporate functions (financial accounting, controlling, payment transactions). In view of the complexity of the control process and the high level of interaction involved, a powerful support tool is indispensable.

The key requirements for such a tool are:

Process

To keep market risks under control, you must be able to gain an up-to-date overview of the relevant risks at all times (What types of risk is the company exposed to? What is the extent of these risks?). This demands a powerful, integrated data management system. Such a system must be capable of recording all the current, future and potential company cash flows and aggregating them to produce meaningful risk positions. In addition, it must allow you to incorporate data from individual transactions (such as conditions or structure characteristics) in your risk assessments.

As part of an integrated data management system, MRM offers all these features.

Key components used in conjunction with MRM are Financial Accounting and Treasury, and since the Logistics and Human Resources components are also integrated, the data is consistent across the company.

For informed risk management, access to a complete set of up-to-date operative cash flows and all effected financial transactions is vital. In order to determine and manage risk, both these areas need to be brought together.

Access to current market data (stock prices, exchange rates, reference interest rates, volatilities, swap rates, and so on) ensures that you have the latest information upon which to base your decisions. The R/3 System allows you to import the following market data:

Because it is no longer feasible to enter current market data for valuing financial transactions manually, particularly when it comes to derivative financial transactions, MRM provides access to Treasury's digital real-time datafeed connection. The datafeed supplies up-to-the-minute market data for your evaluations.

Result

The following section illustrates how MRM can be used and gives you an overview of the main risk measurements offered by the reports.

Values the position for a group of financial transactions. You can calculate the current net present (or future) value for each of the selected financial transactions, based on different market scenarios. In addition, you can calculate interest sensitivity figures and access detail information for the individual transactions.

Assesses the sensitivity of a portfolio of financial transactions to changes in individual risk factors. You can calculate the NPVs for a group of financial transactions, varying two of the risk factors (interest rate, exchange rate, volatility) each time. Moreover, you can use different market scenarios and view the sensitivities in a matrix.

Assesses the sensitivity of a portfolio of financial transactions on the basis of the gains and losses for a certain period. By looking at the gains and losses for different periods (which you define yourself), you can draw conclusions about the extent to which the different circumstances affect your portfolio. You can also run the evaluation with different scenarios.

Calculates the maximum expected loss within a certain period with a certain probability. A risk hierarchy is used to calculate an aggregated risk figure on the basis of historical gains/losses and volatilities and correlations from historical time series.

Calculates the open position that is exposed to the currency or interest rate risk. The system calculates the net present value of the future cash flows for a selected position, taking into account payments that are subject to the risk factors currency (currency exposure) and interest rate (interest rate exposure). The open position is determined by setting the underlying transactions and hedge transactions off against each other within a subperiod. The interest rate risk is usually expressed as a basis point value (BPV). You can also simulate market scenarios.

Gives you an overview of future payment flows as a basis for liquidity control. The system displays the future payment flows for a certain period (with details for subperiods) in transaction currency. Payment flows based on variable interest rates or options are valued using forward data. You can also take market scenarios into account.

Assesses the risk of financial transactions by measuring the sensitivity of these transactions to changes in market parameters. Analyzes the sensitivity of a financial transaction to changes in a market parameter. You call up option sensitivities via the option price calculator, and interest rate sensitivities via the mark-to-market position evaluation.

Allows you to define fictitious transactions and analyze the effect of these transactions on a selected position, taking market scenarios into account. This helps you to select suitable hedge transactions. You can display the value for a selected position (as a net present value, effective price, effective interest rate, cash flow or exposure) for a certain date in the future and see the effect of the fictitious transactions you have defined on the real value of the position. You can incorporate both current forward data and different scenarios.

A range of tools are available for entering and managing financial transactions and for making data available for risk calculations.

Allows you to create your own reports (in addition to the standard reports). You can incorporate both risk data and data from the rest of the SAP system in drilldown reports. By defining rules, you can also generate scenarios in regular reports (such as a daily risk report).