Listed Derivatives (SAP Library - Process Flow Hierarchy)

Listed Derivatives

Purpose

Listed derivatives (options and futures) are standardized forward transactions which are traded on exchanges.

With these transactions, the terms purchase and sale are not used to indicate a position increase or decrease: instead, they indicate the side in the forward transaction. As a result, here, both purchases and sales lead to a position increase.
The increase and decrease of items is represented by the terms Open and Close.

The position is decreased by means of an offsetting transaction with the same class, which is marked as a closing transaction. The possibility of leaving the market at any time by means of an offsetting transaction, without first having to ask the counterparty for permission, is one of two special characteristics which differentiates listed options and futures from options and futures that are traded over-the-counter. The second of the two special characteristics is the fact that the contents of the contracts are firmly standardized.

Prerequisites

After creating the master data for listed options and futures, you use the Extras option to select the respective exchange. Before you can assign exchanges, you need to define them in Customizing by choosing Define Exchange.

Process Flow

There are two basic procedures:

Non-future-style procedure

The buyer (long) of an option enters into no risk, he does not have to put up any collateral. For each of his long positions he receives a credit margin which is offset against his short positions.
The seller (short) has to deposit a premium margin. The margin amount is calculated so that if the position were liquidated today, the loss would be covered. If the price development is such that the loss of the seller increases, he has to increase his margin.

Future-style procedure

In the case of DTB options on DAX futures and DTB options on BUND futures and BOBL futures, there is no immediate payment of the option premium. Instead, the daily settlement price is determined and the difference immediately cleared as profit and loss. Since this settlement method is similar to the procedure for futures, it is known as the future-style procedure. So that both parties in the transaction carry a risk, both sides are obliged to put up collateral.

Result

There are therefore four basic positions:

Long call

The right to buy the underlying from the holder of the short call position at a price agreed in advance. The investor is counting on rising prices. He/she will exercise the option as soon as the market price exceeds the strike price, allowing him/her to buy below the market value.

Short call

The obligation to deliver the underlying to the holder of the long call position at a strike price agreed in advance. (writer of a stock call option). The investor is counting on prices remaining steady or falling slightly, which would make the option worthless. The option is not exercised. Provided the call is covered, the investor can collect the option premium as a yield enhancement for his portfolio.

Long put

The right to deliver the underlying to the holder of the short put position at a strike price agreed in advance. The investor is counting on falling prices. He/she will exercise the option as soon as the market price falls below the strike price, allowing him/her to sell above the market value.

Short put

The obligation to take delivery of the underlying from the holder of the long put position and pay the strike price which was agreed in advance. (Writer of a put option). The investor is counting on prices remaining steady or increasing slightly, which would cause the option to expire worthless and allow him/her to collect the option premium.