You use the scenario for back office processing of standard options to control liquidity, and to recognize, analyze, and hedge against interest rate and securities risks.

In order to process these options, you must have created the master data already required for option trading in the relevant master data scenario.

• In contrast to listed instruments, OTC (over-the-counter) options can have any features and are directly traded between the business partners. On buying a call, the purchaser acquires the right, but not the obligation, to purchase a certain foreign currency amount at a fixed price within a certain period or at a certain date. The seller of the call, on the other hand, has the obligation to deliver the foreign currency amount, for which he receives a premium from the buyer. Puts are processed similarly, but the aim is reversed.
• While the trader is entering the data, he/she has direct access to the option price calculator, allowing him/her to calculate the theoretical value of the option premium. In addition to the premium, the option price calculator also delivers the most important sensitivities for the respective option. The option premium can either be entered as a percentage of the underlying transaction (in basis points) or as a fixed amount.
• When the contract is concluded, the cash flow only consists of the premium. You can represent both European- and American-style options in the SAP R/3 System and can either physically exercise the option or choose cash settlement. The impact of the deals concluded on liquidity is immediately visible in Cash Management.

2. In addition to the functions directly related to the option contract, there are supporting functions for correspondence and confirmation management. The system prepares the transaction data such as activities, flows etc. and creates preliminary letters of confirmation ready for editing. You have the possibility of printing out this data, or of faxing it directly from the system. You can also create S.W.I.F.T. files for option contracts, so that, with the help of a user exit, you can benefit from matching systems for outgoing confirmations, such as FX-Match. When you are defining the correspondence, you can specify that a counterconfirmation from the business partner should be received before further processing takes place. The processing functions incorporate a tool for monitoring counterconfirmations that are overdue.
3. Afterwards, as in the trading area, you have the possibility of calling up information on entered transactions and making any adjustments that might be necessary. You can use the settlement function to control and check the transactions and can add any information that might be missing such as payment instructions or posting specifications. When you save, the system changes the activity category of the transaction, thereby recording the fact that it has been checked and edited in the back office area.
4. Before the transactions are transferred to accounting, you can make use of a netting function for financial transactions. The netting function allows you to summarize transactions from the areas money market, options, and derivatives, and settle them together. One of the main prerequisites for this is that the transactions were created in the same company code, with the same business partner, and have the same currency and payment terms.
5. After the transactions that were entered in trading have been checked and completed in back office processing, they are finally processed in the accounting area. Here, you find functions for transferring the data to Financial Accounting, such as posting reports or postings within the framework of position management; functions which stem from Financial Accounting rather than Treasury. You will also find functions ensuring that financial transactions and positions are correctly taken account of in closing work, including a function for the periodic accrual of revenues and expenses, and valuation functions. In the option trading area you can run key date and foreign currency valuations as well as display realized gains and losses.