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TRM, Hedge Management for FAM 2, Additional Scenarios Locate this document in the navigation structure

 

Technical Data

Technical Name of Business Function

FIN_TRM_INS_HM_2

Type of Business Function

Enterprise Business Function

Available as of

SAP enhancement package 5 for SAP ERP 6.0

Technical Usage

Financial Services

Application Component

SAP Treasury and Risk Management (FIN-FSCM-TRM)

Directly Dependent Business Function Requiring Activation in Addition

TRM, Hedge Management for FAM (FIN_TRM_INS_HM)

You can use this business function to portray different application cases using lean hedging process that eliminate the risk of market price changes or of interest rate changes in financial transactions.

The following hedging categories are available:

  • Fair Value Hedges

  • Cash Flow Hedges

  • The special category Units of Valuation (for Germany) in accordance with the legal regulations and comments of June 30, 2010

With the integration of positions and subpositions as financial objects into Risk Analyzer, you are now able to select directly by position and subposition. This offers the advantage that the calculation of net present values can be based on the positions/subpositions.

Hedge Management for FAM provides a central point of access for auditors, allowing direct access to the hedged items as well as to the related hedging instruments, effectiveness tests, and documentation.

The new logical database TRM, Hedge Management for FAM Reporting (FTI_TR_THX_HEDGE) improves access to the Hedge Management for FAM data for analyzing hedging relationships.

For effectiveness checks, you can use the following new effectiveness test methods:

  • Schleifer noise method to prevent errors occurring with small numbers with the dollar offset method.

  • Linear regression analysis

  • Critical term match method

Hedging relationships that use the forward securities transaction can be rolled over, either partially or in full.

Integration

The new functions are integrated with the functions of Hedge Management for FAM that already exist.

Prerequisites

To use this business function, the following prerequisites have to be met:

  • You have installed the following components as of the version given:

    Type of Component

    Component

    Is Needed Only for the Following Features

    Software Component

    • EA-FINSERV 605

    • SAP_APPL 605

    SAP NetWeaver Business Intelligence (BI)

    SAP NetWeaver 7.0 BI Content Add-On 5

  • You have activated the following business functions:

    Note Note

    End of the note.

  • You have made the Customizing settings for Transaction Manager, Market Risk Analyzer, and Hedge Management for FAM.

  • To be able to use the new functions, you must define the corresponding settings in Customizing for Hedge Management for FAM. For more information on activating the individual functions in Customizing, see the SAP Library under   Financials   Financial Supply Chain Management   Treasury and Risk Management   Transaction Manager   Hedge Management for Financial Asset Management   in the section Overview: Customizing (HM-FAM).

Features

This business function covers the following functions:

Additional Scenarios

  • Fair Value Hedges

    • Hedge a stock position with an OTC option against the risk of a market price change

      You can map an FVH that hedges the price risk of a stock using an OTC option. The price risk of the stock is hedged below the strike price.

      For OTC options, valuation uses the standard net present value calculator of the Market Risk Analyzer for valuating the OTC option (in accordance with the Black and Scholes model). The effectiveness calculation according to the dollar-offset method requires a change in the internal value of the OTC option in relation to the change in the market value of the stock position (for the prospective effectiveness test on the basis of data of the market data yield curve; only hedged price changes below the strike price are included).

      To be able to create a hedging relationship with this hedging scenario, you must first create a new hedging profile in Customizing for Hedge Management for FAM to which you assign hedging scenario 120 FVH: stocks hedged with OTC option. This hedging profile is then available when you create a new hedging relationship.

    • Hedge a stock position in a foreign currency with forward security transactions against the risk of a market price change

      You can now also hedge the price risk of a position stock whose position currency does not match the local currency using a forward securities transaction. Any currency risk that exists for the position however is not hedged.

      When you create such a hedging relationship you can use an existing hedging profile to which the hedging scenario 110 FVH: stocks hedged with forward securities transactions is assigned.

      When a valuation takes place during the term of the hedging relationship, the security valuation is posted to the profit and loss statement, however the forex valuation is still posted to OCI.

    • Hedge a stock position with an total return swap against the risk of a market price change

      You can now hedge the price risk of stock positions by means of a total return swap.

      To be able to create a hedging relationship with this hedging scenario, you must first create a new hedging profile in Customizing for Hedge Management for FAM to which you assign hedging scenario 130120 FVH: stocks hedged with TRS. This hedging profile is then available when you create a new hedging relationship.

    • Hedge a security position against the interest rate risk by means of an interest rate swap

      You can use this hedging scenario to hedge the interest rate risk of a variable, interest-bearing bond by means of an interest rate swap.

      To be able to create a hedging relationship with this hedging scenario, you must first create a new hedging profile in Customizing for Hedge Management for FAM to which you assign hedging scenario 150120 FVH: Securities Hedged with Interest Rate Swap. This hedging profile is then available when you create a new hedging relationship.

  • Units of valuation (UoV)

    Units of valuation are required by law in accordance with German accounting rules. A unit of valuation is similar to a Fair Value Hedge. The main difference between them is how they are valuated. When a valuation takes place, the market value of the hedging instrument is added to the market value of the hedged item and after this the book value and the write up/down are calculated accordingly.

    You can now map units of valuation using a hedging relationship. You can hedge an underlying transaction using multiple hedging instruments. A unit of valuation does not distinguish between the different risk categories as the whole market value is taken into account.

    With the legal regulations and comments as of June 30, 2010, mathematical effectiveness tests are not necessary.

    The following new hedging scenarios are available for mapping the units of valuation:

    • 510 UoV: Forward exchange transactions as hedging instruments

    • 520 UoV: Swaps as hedging instruments

    • 521 UoV: Futures as hedging instruments

    • 522 UoV: Forward securities transactions (FSTs) as hedging instruments

    • 523 UoV: Forward contracts as hedging instruments

    • 530 UoV: Forward exchange transaction hedged by forward exchange trading

    • 531 UoV: Swap hedged using swaps

    • 532 UoV: FST hedged using forward exchange trading

  • Cash Flow Hedges

    A cash flow hedge hedges the risk of fluctuations in a cash flow. In Hedge Management for FAM, you can portray the following scenarios in which the hedged fluctuation risk is always the interest rate risk:

    • 710 Hedge a security position against the interest rate risk by means of an interest rate swap

    • 720 Hedge a loan against the interest rate risk by means of an interest rate swap

    With a cash flow hedge, changes to values of the hedging instrument are entered directly in equity if it affects the effective part of the hedge, while the ineffective part is posting in the P&L statement.

Test plan enhancements

You can use the new test plan category to make various settings for the test plan when you define the hedging profiles.

  • The test plan is just a suggestion; all tests are valid

  • The test plan is mandatory but performing additional tests is optional

  • Effectiveness tests are disabled

    • You can choose this setting for hedging profiles which you can use to map hedging relationships in accordance with the shortcut method. With the shortcut method, a hedging relationship is always effective without this being explicitly tested.

    • You must choose this setting for the hedging profile for mapping units of valuation.

Use rollover of hedging relationships that use forward securities transactions

You can roll over a hedging relationship in two different ways:

  • If you roll over a forward securities transaction belonging to a hedging relationship, the corresponding hedging relationship is automatically rolled over as the dedesignation date is updated with the new end date of the rolled over forward securities transaction.

  • You also roll over the hedging relationship when you replace the designated forward securities transaction at the end of its term with a new forward securities transaction

With both methods of rollover, you can roll over the hedging relationship as a whole or partially.

See also: Rollover of the Hedging Relationship

New Effectiveness Test Methods

  • Schleifer Noise Method

    Until now the dollar-offset method was available for the effectiveness test. With this method, the results can contradict the actual economic reality. It can result, for example, in very small changes in the values which can cause a hedging relationship to be valuated as ineffective although this is actually not the case (problem with small numbers).

    The Schleifer-Noise method is available to avoid problems with small numbers. With this effectiveness test method you specify a threshold value (in percent) which defines the maximum fluctuations in value allowed that do not affect the effectiveness valuation.

    In addition to the threshold value you can also specify a transition speed. This determines the transition from effectivity to ineffectivity of a hedging relationship. The speed of transition influences the transition area between the area in which the threshold value dominates and the area in which the threshold value has no effect. The quicker the transition speed, the smaller the transition area.

    See also: Schleifer Noise Effectiveness Test Method for Hedging Relationships

  • Linear Regression

  • Critical Term Match Method

Integration of positions and subpositions into Risk Analyzer

With the integration of positions and subpositions as financial objects into Risk Analyzer, you are now also able to select directly by position and subposition. This represents an advantage because the calculation of the net present value is based on the positions/subpositions. In addition to this, it fulfills the requirements of FAS 157 and simplifies the mapping of rollovers.

The integration was realized for the following product types:

  • 010 Stock

  • 020 Investment certificate

  • 030 Subscription right

  • 040 Bond

  • 041 Drawable bond

  • 160 Shareholding

  • 620 Swap

  • 700 Futures

  • 740 Forward securities transaction

  • 760 OTC option

Note Note

This functionality is also provided with business function TRM, New Instruments, Enhancements Accounting, Reporting (FIN_TRM_LR_FI_AN_3).

End of the note.
New logical database for HM-FAM

The new logical database TRM, Hedge Management for FAM Reporting (FTI_TR_THX_HEDGE) is available for reporting your hedging relationships in Hedge Management for FAM.

Enhancements in SAP NetWeaver Business Intelligence (BI)

The BI content for SAP Treasury and Risk Management has been enhanced by fields relevant to Hedge Management for FAM.

Example

Examples can be found in the test case descriptions of the business function. Call transaction Switch Framework Customizing (SFW5) and then call the test catalog with the same name for this business function TRM. Hedge Management for FAM 2, Additional scenarios (FIN_TRM_INS_HM_2). The test catalog contains the following test case descriptions:

  • FVH: Stock (PC not equal to LC) Hedged with FST (Price Risk)

  • FVH: Stock in LC Hedged with OTC Option (Price Risk)

  • FVH: Bond Hedged with Interest Rate Swap (Interest Rate Risk)

  • UoV: Stock in Unit of Valuation with FST

  • CFH: Bond Hedged with Interest Rate Swap (Interest Rate Risk)

More Information

  • For more information, see release note FIN_TRM_INS_HM_2: TRM, Hedge Management for FAM 2, Additional Scenarios (New).

  • For more informationen, see the SAP Library under   SAP ERP Central Component   Accounting   SAP Financial Supply Chain Management (FIN-FSCM)   SAP Treasury and Risk Management (TRM)   Transaction Manager   in the sections on Hedge Management for Financial Asset Management.