The Market Risk Analyzer (CFM-MR) component of SAP Corporate Finance Management offers corporations and insurance companies a range of functions for managing risks on a global basis.

Of all the various external risks to which companies competing on international markets are exposed, market price changes impact considerably on the success of an enterprise. They can have a profound effect on the amount, present value, or timing of payment flows. Operative business and Treasury transactions alike are affected by market risks. In order to determine and manage risks fully, it is essential to bring together all the risk-related company activities.

In recent years, no other area has come close to developing such an extensive toolset for measuring risk as market risk management. The comparatively high availability of the most up-to-date market data and historical market data means that the risk volume can be quantified precisely, therefore providing an ideal basis for risk management.

The methodical capability of modern risk management systems enables companies to perform detailed valuations for their existing positions which cover all the factors that affect prices. What is more, the decision-support aspect of risk management is gaining importance to ensure the successful implementation of company strategies. Simulating future portfolio structures and incorporating potential market trends in the analyses is becoming a key aspect of preventative financial management.

At the same time, risk management is no longer merely an instrument of control after the event, but one capable of adding value to a company. The development of new financial instruments, the improvement in investor relations and the company reputation on the capital market as a result of proven risk reduction, are just a handful of the aspects accompanying this trend. The company organization is also feeling the effects of this change since risk controlling now reports directly to the board.

Companies also have to consider the growing number of legal regulations, some for specific industries, some for all industries, which call for the establishment of risk management systems within the enterprise. Here, the legislators have protected the interests of the investors by taking into account the vast expansion of the risk scope, which has gone hand in hand with the globalization of markets.

The Market Risk Analyzer has been designed to cater for the requirements of all industry sectors. It combines the methodical requirements of the financial services area with the possibility of incorporating payment flows from the operative company activities into the risk analysis. You can use individually-defined portfolio hierarchies to analyze risks according to the underlying factors (exchange rates, interest rates, prices, volatilities). Analyses for a given date, such as mark-to-market valuations, as well as dynamic evaluations, such as position trend analyses or profit and loss simulations, belong to the functional spectrum of the Market Risk Analyzer. Identifying open risk positions in the interest or currency exposure is supported along with value at risk procedures as classical risk control instruments.

In the integrated SAP environment, you have all the information you need for risk management at your fingertips. You have the option of adding transaction simulations and market data scenarios to real transactions and market data, to highlight the change potential, in other words, how much difference alternative hedging strategies would make. This enables the Market Risk Analyzer to fully support your trading activities.

For informed risk management, it is essential to capture all risk-related activities. Market risks influence all the payment flows in a company irrespective of where they originate. The integrated system environment ensures that once all the necessary information has been entered, it can be accessed automatically. This is equally true for operative activities within the logistical chain and for transactions that have been entered in the Transaction Manager. The SAP System can minimize the number of interfaces between different systems that have to be defined and maintained. This is usually a major cost consideration when implementing risk management systems.

The link between the Market Risk Analyzer and real-time datafeed also provides access to current market data that can be used to analyze risk positions. The imported data is stored centrally and is available across the entire system, thus ensuring a consistent data basis for all evaluations.

The main task of risk management is to identify potential losses on the basis of current market data. The Market Risk Analyzer provides you with a comprehensive system for calculating the net present value of common financial instruments. The calculated values (net present values or clean prices) can be stored and used later for accounting purposes by the valuation functions of the Transaction Manager. This also complies with the requirements of FAS 133. The calculation steps carried out are recorded clearly and comprehensibly in a log together with the market data upon which they were based. In addition, extensive documentation on the financial mathematical models used is also available.

To cope with the risk profiles of complex financial instruments, a data model has been developed using the concept of a risk object. By linking several elementary components, it can map flexible business structures. The system offers you an architecture that can adapt to future demands. It integrates risks in the valuation methodology of the Market Risk Analyzer, independently of the underlying business processes.

Net present values are used to measure the sensitivity of portfolios to changes in market data and to highlight potential changes. You can represent classical sensitivity key figures, such as basis point values, durations, convexities, and greeks in the Market Risk Analyzer as well as differentiated simulation scenarios. These scenarios contain any combination of market data values and can be integrated into all the Market Risk Analyzer evaluations. You can even map a series of scenarios in chronological order in the system as scenario progressions. Using different simulation procedures, you can adapt market fluctuations to current market data dynamically, or keep them constant as extreme value scenarios (stress tests) over any time periods.

Portfolio structure changes, like market data changes, also play a vital role in new business planning. In this case, the Market Risk Analyzer provides a series of evaluations, based on individual or standardized planning specifications, which enable you to generate simulated transactions and analyze their impact on the liquidity of your company, the business structure, and the profit and loss.

For many companies that are actively involved in global markets, analyzing and hedging foreign currency risks is an essential element of market risk management. To capitalize on economies of scale and set up hedging activities for aggregated foreign currency payments across the group, central treasury departments frequently turn currency management to their advantage. This restricts local activities to transactions that are required for processing incoming or outgoing payments or those that observe the statutory regulations. This type of structure places high demands on the system landscape to include all the relevant liquidity flows in the foreign currency planning. The SAP Cash Management module undertakes the necessary preparatory tasks for this; it prepares a formatted data basis by bringing together local payment activities in a distributed system landscape. The Market Risk Analyzer can access this information directly, without needing its own interface. The financial transactions entered in the Transaction Manager are then compared with the operative payments. For flexible maturity bands, the currency exposure then calculates the remaining open items for each currency, which can be used for further hedging activities. You can use drilldown reporting to call up detailed information for individual items at any time.

Ensuring liquidity is a fundamental condition for revenue-oriented and risk-oriented enterprise management. In this area too, companies today require a system that does much more than simply combine actual payment information. Only when your liquidity planning is integrated and market data changes simulated do you have a solid base of information for analyzing your liquidity. By incorporating scenarios or scenario progressions, the Market Risk Analyzer allows you to analyze the impact of market fluctuations on the liquidity of your company (for example the amount of variable or optional cash flows), and use simulated financial transactions to smooth out identified liquidity surpluses or deficits.

Value-at-risk analysis is an extension of net present value analysis and uses a standard measure for risk. It uses historical or simulated market data to calculate the value loss of a position which, based on a certain probability, within a certain period, could be incurred before the position is hedged or sold.

Due to its uniform net present value approach, value-at-risk analysis has taken off as a risk-controlling instrument. The increased popularity of this procedure has been helped to a large extent by the vast improvement in the availability of (historical) market data in recent years. The Market Risk Analyzer supports the models that are currently commonly used on the market.

It is also possible to use a combination of procedures depending on the instrument valued. You can import external data for the calculations or use the market data stored in the SAP tables. A statistics calculator enables you to estimate volatilities and correlations for the variance/covariance approach.

You can structure the risk factors you want to use to calculate and display the value at risk in risk hierarchies that you can configure yourself. You can also use risk hierarchies to determine the aggregation procedures and levels.

To counteract risks efficiently, it is absolutely necessary to clearly quantify the risk contribution of individual risk factors (such as interest, currencies), risk objects (such as financial transactions), or organization entities (for example, profit center). It must therefore be possible for you to perform risk analyses according to the most varied criteria and at different aggregation levels. If, for example, you want to have a value-at-risk key figure just as summarized information at company-wide level, you still have to specify the risk amounts in detail for each of the relevant underlying factors to comply with hedge accounting requirements.

For problems such as these, the Market Risk Analyzer takes advantage of flexibly definable portfolio hierarchies, which are used not only to determine the characteristics according to which risks are separated, but also to specify the hierarchy levels at which the individual risks are summarized. The portfolio structure is based on the characteristics of the risk objects (financial transactions, operative cash flows), which are stored in the system in an internal data pool. Each of these characteristics (for example, trader, transaction currency, type of financial instrument, exchange) can be used to build up the portfolio hierarchy. If some of the characteristics are assigned to a portfolio hierarchy node, all objects that have these characteristics are automatically displayed under the corresponding node. Since it is possible to create any number of portfolio hierarchies on the basis of the data pool, the different aspects of risk reporting (organizational and instrument-specific) are covered at all times.

The sheer flexibility in evaluation control and the highly sophisticated tools combine to make the Market Risk Analyzer an efficient instrument for controlling risk for companies across all sectors of industry. In addition, the Market Risk Analyzer can access all the information related to risks that is available in the system without needing a special interface to do so. When you map operative activities using the SAP Cash Management module or enter financial transactions in the Transaction Manager, you have all the real-time data you need for the Market Risk Analyzer reports. What is more, there is no need to enter anything twice.

To access the application functions for the Market Risk Analyzer, choose Accounting ® Corporate Finance Management ® Market Risk Analyzer.

In order to be able to user the Market Risk Analyzer component, you must make the necessary Customizing settings in the IMG sections Corporate Finance Management ® Basic Analyzer Settings and Market Risk Analyzer.

As the CFM Market Risk Analyzer functions were taken from the Market Risk Analysis components of the Industry Business Solution SAP Banking, the documentation available there has also been released here. This documentation therefore contains menu paths from SAP Banking. We plan to adapt these in the future for CFM users.