New Developments

for Treasury and Risk Management

in Enhancement Package 3

Heike Ripp, Aniket KulkarniSolution Manager Treasury and Risk ManagementSAP ERP FinancialsSAP AG

June 03, 2008

© SAP AG 2009. All rights reserved. / Page 2

Legal Disclaimer

This presentation is a preliminary version

and not subject to your license agreement

or any other agreement with SAP.

This document contains only intended

strategies, developments, and functionalities

of the SAP® product and is not intended to

be binding upon SAP to any particular

course of business, product strategy, and/or

development. Please note that this document

is subject to change and may be changed

by SAP at any time without notice.

SAP assumes no responsibility for errors

or omissions in this document.

© SAP 2008 / Page 3

Optimize Finance With Treasury Applications

From SAP

Treasury applications from SAP

SAP Treasury and Risk Management

Risk Analyzer

Transaction Manager

Credit Risk Market Risk Portfolio

Hedge Mgt Exposure Mgt

MM FX SEC COMDER DEB

Manage Financial

Risks

Manage Financial

Instruments

© SAP 2008 / Page 3

SAP Bank Communication Management

SAP Cash & Liquidity Management

SAP In-House Cash

Cash Management Liquidity Planning

Manage Cash

© SAP 2008 / Page 4

Overview of New Developments

New Instruments: Commodity Futures and Options Commodity Forwards Market Risk Analysis of Commodity paper deals Enhancements of listed Options

Improved legal requirements: Valuation Class and Portfolio Transfer Amortization of Money Market deals New Accrual functionality for OTC transactions

Hedge Management: Hedge Documentation Hedge of a net investment Other enhancements in Hedge Management

Portfolio Analyzer: Portfolio risk adjusted performance

Credit Risk Analyzer: Online limit check for security transactions Relative Limits

Credit Risk Analyzer: New value at Risk key figures New key figures – Yield to maturity and modified duration

© SAP 2008 / Page 5

Commodity Master Data

Commodity master data:

Commodity master data is where the Commodity details like the commodity type,

group or Unit of measure are stored. Derivative instruments are created in system

using this information.

New BAPI for Commodity master data is available

© SAP 2008 / Page 6

Commodity Futures and Options

Commodity Futures / Options:

New popup at definition of a security class to select a commodity (master data has to

exist in the system before)

New product type for Commodity Futures and listed Commodity Options (Future Style)

New feature for matching of positions (FIFO, LIFO or manual matching)

© SAP 2008 / Page 7

Futures: Matching of Positions

Manual Matching: Several long and short positions could be matched manually if the units does match

exactly

If the units does not match exactly only one long and one short position could be matched manually

If the match does not fit the requirements it could be reversed step by step or it could be discard

FIFO / LIFO proposal: The system does generate a proposal for all possible matches

If the match does not fit the requirements it could be reversed step by step or it could be discard

© SAP 2008 / Page 8

Commodity Forwards

Commodity Forwards:

Commodity Forwards can only be cash settled – delivery is NOT supported

Commodity Forwards are integrated in TR-TM (OPEN TRTM etc supported)

Commodity Forwards use Commodity Master data like Futures and Options

© SAP 2008 / Page 9

Market Risk Analysis of Commodity Paper

Deals

Commodity Future

For commodity futures, the NPV at the end of day after margin call is zero. But, the theoretical price will be the discounted spot price with risk free interest for the residual maturity of future.

Commodity Forward

Theoretical price of commodity forwards is calculated, with discounting the spot price of the Forward with risk free interest rate for the period.

Commodity Option

Price of commodity options is calculated using “Black 76” model. This model uses commodity future price volatility of price the option (as the underlying of commodity option is commodity future)

VaR of Commodity Paper Deals:

For all the commodity paper deals in the system, it is possible to calculate the Value at Risk (VaR)

© SAP 2008 / Page 10

Enhancement of Listed Options

Supports lifecycle of exchange traded options (normal style):

open close

partial close

expiration

accounting

Calculates NPV in Market Risk Analyzer

options on stock, bond and security index

© SAP 2008 / Page 11

Valuation class and portfolio transfer

Valuation Class Transfer:

Whenever you want an existing deal or security position to be valuated differently, you need to transfer it to a new position with a different valuation class. While this has been possible in the securities and loans area with the transaction TPM15, it was impossible for money market, foreign exchange and OTC derivatives.

The new transaction TPM15M offers now a valuation class transfer for securities, money market, foreign exchange and OTC derivatives. You still have to use TPM15 to transfer loans, you could use it for securities as well.

You can do partial transfers for securities only. Positions of other contract types have to be transferred completely.

Portfolio Transfer:

Business scenarios might require to identify security positions by portfolio. In these cases you might want to assign a whole security position or a part of it to a new portfolio. The portfolio transfer represents this process.

© SAP 2008 / Page 12

Amortization of money market deals

When entering a main flow for

a fixed term deposit, or

a cash flow transaction, or

an interest rate instrument or

an commercial paper,

a nominal amount can be specified that can differ from the payment amount. This

function is only used for amortizations.

© SAP 2008 / Page 13

New Accrual Functionality for OTC Deals

For the accrual/deferral of profits/losses from OTC transactions now have to use the

accrual/deferral functions previously only available in the Securities area (transaction

TPM44, reversal transaction TPM45).

You replace the existing accrual/deferral functions for OTC transactions (transactions

TBB4 and TBB5) to enable all financial transactions in the Transaction Manager to be

accrued/deferred using new accrual functionality (TPM44).

Accruals/deferrals flows for OTC

transactions that you executed

with the old accrual/deferral

function (transaction TBB4) in an

earlier release, first need to be

migrated (TPM migration).

All accrual and deferral flows need

to be posted before running the

conversion program.

© SAP 2008 / Page 14

Hedge Documentation

© SAP 2008 / Page 14

© SAP 2008 / Page 15

Hedge Of A Net Investment

The net investment in a subsidiary could until now being hedged with foreign

currency instruments, it is now also possible to use money market instruments. The

note 954065 helps to downgrade the functionality to ERP2004.

Till now only the assignment of one Exposure to the Hedge Plan was possible, now

the assignment of several Exposures is possible. (Note 813731)

© SAP 2008 / Page 16

Other Hedge Enhancements

It is possible to choose the existing exposure within the transaction TX01 instead of

create a new hedge plan or insert into an existing hedge plan.

There are 2 additional fields available in the hedge plan - grouping and program.

They enable the user to group his hedge plans according to his individual needs. The

names are free definable.

© SAP 2008 / Page 17

Other Hedge Enhancements II

With the click on the button „History‟ on the Hedge Relationship tab you obtain to

the list of versions of the Hedge Relationship with the Status Description like

„active‟, „dedesignated‟ or „dissolved‟. (up) On the bottom part of the screen you

can see the Valuation Versions from which you can click into detailed Log of the

Effectiveness Test and into the Market Data were used. You enable it with the

flag on the valuation screen (TPM) or in customizing under

„Define Calculation Types‟ flag

© SAP 2008 / Page 18

Portfolio risk adjusted performance

Apart from calculating yield on a portfolio and benchmarking a portfolio to standard market portfolio, It is necessary o measure the quality of return, hence the following new Risk Key Figures are introduced:

• Sharpe Ratio

• Standard Deviation of portfolio yield

• Standard Deviation of benchmark yield

• Jensen‟s Alpha

• Regression Beta

• Treynor Ratio

• Regression Beta

• Sortino Ratio

• Downside Risk

• Information Ratio

• Tracking Error

© SAP 2008 / Page 19

Relative Limits

Can compare same

key figures from

different portfolios

OR

Different key figures

from the same portfolio

Can choose the

„Utilization Portfolio‟

and the „Reference

Portfolio‟. They can be

same or different.

Limits can be defined

as „Percentage‟,

„Absolute‟ Or „Both

Percentage and

Absolute‟

Choose UtilizationPortfolio

Utilization Key Figure

Choose ReferencePortfolio

Reference KeyFigure

Define LimitsPercentage

Define LimitsAbsolute

New transaction for Master Data: KLREL_LIMIT_ASS

© SAP 2008 / Page 20

Online limit check for security transactions

© SAP 2008 / Page 21

New value at Risk key figures

The effects of small changes in portfolio composition are measured by the Marginal VaR (MVaR). The contribution of a position or sub-portfolio to the total portfolio VaR is measured by the VaR Contribution (VaRC).

Certain VaR methods are based on a normal distribution for the profits and losses of a portfolio. But in reality the probability for high profits and high losses is often much higher than that of the normal distribution. The Mean Excess Loss (MEL) is used to solve this problem.

New key figures are avaliable with the following VaR calculation methods:

VaRC: variance covariance delta

MVaR: variance covariance delta

These two reported at single FO level and PH level

Mean excess loss: Only historical simulation method

© SAP 2008 / Page 22

New Key Figures: VaR (Key Figure Hierarchy

View)

New key figures:

• VaR Contribution (VaRC)

• Marginal VaR (MVaR)

• Mean Excess Loss (MEL)

© SAP 2008 / Page 23

New key figures – Yield to maturity and

modified duration

Modified Duration:

Modified duration is derived by making a small adjustment (modification) to the Macaulay duration value, as it considers bond‟s yield to maturity. Modified Duration is an adjusted measure of duration which can be used to approximate the interest rate sensitivity of an option-free (straight) bond.

Yield To Maturity

Calculated using Yield to maturity of a bond, YTM is the internal rate of return of a bond.

Both Modified duration and YTM are calculated for instruments sensitive to interest rates like Bonds Interest rate securities Money market instruments Interest rate SWAPS

© SAP 2008 / Page 24© SAP 2008 / Page 24

Outlook

Enhancement Package 4 for SAP ERP 6.0

SWIFT

correspondence

monitor

Efficiency

Insurance

Industry Focus

Hedge Management

for Commodities

Regression Analysis

IFRS 7 Reporting

Compliance

New Exposure

Management

Exposure Integration

into Market Risk

Analyzer

Transparency

© SAP 2008 / Page 25

Upcoming Events

www.sap.com/treasuryconference

http://www.eurofinance.com/conferences/International08/08c_Intl_main.html

© SAP 2008 / Page 26

Thank you!

© SAP 2008 / Page 27

Copyright 2007 SAP AG

All rights reserved

No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of SAP AG. The information contained herein may be changed without prior notice.

Some software products marketed by SAP AG and its distributors contain proprietary software components of other software vendors.

SAP, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver, Duet, Business ByDesign, ByDesign, PartnerEdge and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. All other product and service names mentioned and associated logos displayed are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary.

The information in this document is proprietary to SAP. This document is a preliminary version and not subject to your license agreement or any other agreement with SAP. This document contains only intended strategies, developments, and functionalities of the SAP® product and is not intended to be binding upon SAP to any particular course of business, product strategy, and/or development. SAP assumes no responsibility for errors or omissions in this document. SAP does not warrant the accuracy or completeness of the information, text, graphics, links, or other items contained within this material. This document is provided without a warranty of any kind, either express or implied, including but not limited to the implied warranties of merchantability, fitness for a particular purpose, or non-infringement.

SAP shall have no liability for damages of any kind including without limitation direct, special, indirect, or consequential damages that may result from the use of these materials. This limitation shall not apply in cases of intent or gross negligence.

The statutory liability for personal injury and defective products is not affected. SAP has no control over the information that you may access through the use of hot links contained in these materials and does not endorse your use of third-party Web pages nor provide any warranty whatsoever relating to third-party Web pages

Weitergabe und Vervielfältigung dieser Publikation oder von Teilen daraus sind, zu welchem Zweck und in welcher Form auch immer, ohne die ausdrückliche schriftliche Genehmigung durch SAP AG nicht gestattet. In dieser Publikation enthaltene Informationen können ohne vorherige Ankündigung geändert werden.

Einige von der SAP AG und deren Vertriebspartnern vertriebene Softwareprodukte können Softwarekomponenten umfassen, die Eigentum anderer Softwarehersteller sind.

SAP, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver, Duet, Business ByDesign, ByDesign, PartnerEdge und andere in diesem Dokument erwähnte SAP-Produkte und Services sowie die dazugehörigen Logos sind Marken oder eingetragene Marken der SAP AG in Deutschland und in mehreren anderen Ländern weltweit. Alle anderen in diesem Dokument erwähnten Namen von Produkten und Services sowie die damit verbundenen Firmenlogos sind Marken der jeweiligen Unternehmen. Die Angaben im Text sind unverbindlich und dienen lediglich zu Informationszwecken. Produkte können länderspezifische Unterschiede aufweisen.

Die in diesem Dokument enthaltenen Informationen sind Eigentum von SAP. Dieses Dokument ist eine Vorabversion und unterliegt nicht Ihrer Lizenzvereinbarung oder einer anderen Vereinbarung mit SAP. Dieses Dokument enthält nur vorgesehene Strategien, Entwicklungen und Funktionen des SAP®-Produkts und ist für SAP nicht bindend, einen bestimmten Geschäftsweg, eine Produktstrategie bzw. -entwicklung einzuschlagen. SAP übernimmt keine Verantwortung für Fehler oder Auslassungen in diesen Materialien. SAP garantiert nicht die Richtigkeit oder Vollständigkeit der Informationen, Texte, Grafiken, Links oder anderer in diesen Materialien enthaltenen Elemente. Diese Publikation wird ohne jegliche Gewähr, weder ausdrücklich noch stillschweigend, bereitgestellt. Dies gilt u. a., aber nicht ausschließlich, hinsichtlich der Gewährleistung der Marktgängigkeit und der Eignung für einen bestimmten Zweck sowie für die Gewährleistung der Nichtverletzung geltenden Rechts.

SAP übernimmt keine Haftung für Schäden jeglicher Art, einschließlich und ohne Einschränkung für direkte, spezielle, indirekte oder Folgeschäden im Zusammenhang mit der Verwendung dieser Unterlagen. Diese Einschränkung gilt nicht bei Vorsatz oder grober Fahrlässigkeit.

Die gesetzliche Haftung bei Personenschäden oder die Produkthaftung bleibt unberührt. Die Informationen, auf die Sie möglicherweise über die in diesem Material enthaltenen Hotlinks zugreifen, unterliegen nicht dem Einfluss von SAP, und SAP unterstützt nicht die Nutzung von Internetseiten Dritter durch Sie und gibt keinerlei Gewährleistungen oder Zusagen über Internetseiten Dritter ab.

Alle Rechte vorbehalten.