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ABC Limited

ABC Market Risk Analyzer

DRAFT BUSINESS BLUEPRINT

SAP Corporate Finance Management


Version- 1.0

11th March, 2006

ABC

Corporate Fund Management

Table of Contents
1

SCOPE AND APPROACH...................................................................................4

ORGANIZATION STRUCTURE........................................................................7
2.1
2.1.1
2.1.2

ORGANIZATIONAL STRUCTURE FOR MARKET RISK MANAGEMENT........................7


DEFINITION AND MEANING..............................................................................7
RELATIONSHIP / DEPENDENCIES ON OTHER ORGANIZATIONAL ENTITIES.........7

MASTER DATA.....................................................................................................9
PROCESS
3.1.1.1
3.1.1.2
3.1.1.3
3.1.1.4
3.1.1.5

EXPLANATION (TO-BE)....................................................................................9
SPECIAL ORGANIZATION CONSIDERATION.....................................................12
DESCRIPTION OF IMPROVEMENT....................................................................12
DESCRIPTION OF FUNCTIONAL DEFICIENCIES................................................12
APPROACH TO COVER FUNCTIONAL DEFICIENCIES.........................................12
INTERFACE CONSIDERATIONS........................................................................12

REPORTING.......................................................................................................13
4.1

GLOSSARY.........................................................................................................14

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ABC

Corporate Fund Management

Executive Summary
Company Profile

SAP Implementation

Objectives
Along with the process re-engineering and mapping the project team has to
manage Organization Change Management. The purpose of Organization
Change Management is to ensure that ABC achieves the expected results
from its investment in SAP technology in a short span of time. As part of this
service, XXX will work closely with ABC to introduce the change process,
stress the importance of organizational alignment, and introduce the
necessary tools and techniques needed to address issues in the Organization.

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ABC

Corporate Fund Management

Scope and Approach


Scope
The scope for the current Market Risk Analyzer implementation of SAP
Corporate Finance Management (CFM) software at ABC can be described as
below:
1. Actively monitor and manage market risk
2. Support the framework for evaluation and quantification of
Market Risks
3. To support management of risks arising from foreign exchange,
interest rate and commodity price exposures

Business Requirements /As-Is


The basic objective of the implementation of Market Risk Analyzer is to
ensure that the treasury activities are in line with company objectives. The
treasury should manage all market risks as soon as they are identified within
the acceptable limits. These exposures include Foreign Currency Risks,
Interest rate and commodity price exposures.
Similarly the organization is exposed to credit, issuer and settlement risks.
These are however handled by SAPs Credit Risk Analyzer, which helps
maintain limits for counterparties and calculate exposures to counterparties.

Foreign Currency Risks


ABC is usually exposed to foreign currency risk arising out of the following
types of exposures:
1. Import of raw material and stores
2. Import of capital equipments
3. Export of products
4. Foreign Currency Loans (Short term & Long Term)
5. Investments in Foreign operations and new acquisitions
6. Payments to consultants in foreign currency

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ABC

Corporate Fund Management

Interest Rate Risks:


Broadly ABC is exposed to Interest rate risk arising out of the following
types of exposures:
1) Domestic and Foreign Loans (Long & Short Term)
2) Working Capital Borrowing

At present ABC does not have a well defined interest rate risk management
policy; it takes all decisions through the Investment committee. Excess
liquidity is invested in the Mutual Funds and sometime in Inter Corporate
Deposit within the Tata group. It does not invest in money and debt markets.
Tools for Managing Interest Rate Risks
List of Authorized Instruments for managing Interest Rate Risk:
List of authorized instruments:
1) Interest rate swap
2) Constant maturity swap
3) Forward rate agreement
Combination of the above instruments will be used only for hedging interest
rate liability in foreign currency. As per RBI guidelines the structured
products cannot be used to hedge domestic interest rate risk
Structured Products include
a) Single Barrier Options
b) Double Barrier Options
c) Knock in / Knock out Options
d) DOT
e) Range accrual swaps
Commodity Risks

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ABC

Corporate Fund Management

ABC is exposed to commodity price risk both on input raw materials and
output finished products. From hedging perspective following input materials
are significant:
1) Coal
2) Zinc
3) Ocean freight
4) Steel
Coal and Zinc forms a significant portion of cost of producing the finished
products. Ocean freight rate, which is the integral part of major raw material
cost including coal and limestone also form a major portion of import cost.
Instruments used for hedging commodity risk:
Coal : Nymex Futures
Zinc : Zinc Future of LME
Freight: Freight Futures, Forward Freight agreement, Swap
Steel: Buy futures, sell futures, buy put option, buy call option

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Organization Structure
The following organizational definitions have been done at ABC .

2.1

Organizational Structure for Market Risk Management


2.1.1 Definition and Meaning
The following are the key entities for Market Risk Management:
Analysis Structure: The analysis structure is the organizational unit used to
analyze and control risk in businesses. The analysis structure is the highest-level
organizational and evaluation unit in Risk Analysis
Portfolio: An organizational unit that enables financial transactions and positions
to be brought together and aggregated position analyses to be undertaken.
Portfolios are also used to control and evaluate risk items in risk management.
Valuation Areas: Used for position management (example: Operative valuation
area and parallel valuation area).
Portfolios
The key considerations while evaluating a set of portfolios for ABC were:
1. Its amenability to reporting requirements
2. Its help in evaluating returns and carrying out further analysis
3. Its help in tracking each transaction
4. Its scalability for newer areas of operations
The proposed structure of portfolios at ABC is given below:
A portfolio will be defined for every area of treasury activity. The portfolios will
be as below:
Newer portfolios can be added if, for example, the company enters into newer
areas of operations

2.1.2 Relationship / Dependencies on other organizational entities


Relationship with entities in Financial Accounting

ABC

Corporate Fund Management

Portfolio: A portfolio is created in a company code. The portfolios for ABC , as


mentioned above will be linked to the company code ABC HO
Valuation Areas are assigned to company codes in financial accounting

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ABC

Corporate Fund Management

Master Data
Process Explanation (To-be)
The creation of master data for Market Risk management would involve creation
of the following key Master Data:
Characteristics: A characteristic is a value used for reporting. The following
characteristics would be used:

Product Type
Business Area
Business Partner
Profit Center
Portfolio
Trader

Characteristic Hierarchy:
The characteristic hierarchy is used for grouping reporting characteristics into
various hierarchical groups for reporting purposes.
The following Characteristic group* could be used:

* This is only an Indicative structure

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ABC

Corporate Fund Management

Financial Object:
The role of the Financial Object is to link the information required for reporting
(Characteristic) with the evaluation/valuation method. Financial objects can be
generated for all the transactions. For e.g. financial objects can be created for
each fixed deposit, loan, foreign exchange, derivative or security transactions.
Risk Hierarchy:
In order to achieve a more comprehensive level of control, market risk has to be
split up into its component parts. Market risk can be divided into the following
risk categories:
Interest rate risk
Currency risk
Commodity risk
Every risk category can be further divided into specific partial risks.
In the interest area, there can be sub-markets for swaps, bonds, money market
transactions, etc., and each one has the corresponding partial risks. Partial risks
are generally different for every currency area.
Risk factors will form the basis of Risk Hierarchies. Risk factors also represent
the price factors for the instruments in the portfolio.
Every level of a risk hierarchy is a consolidation level.
Risk hierarchies are built by starting with the market risk and working down to
the individual risk factors.

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ABC

Corporate Fund Management

The Risk Hierarchy* could be as follows:

* This is just an Indicative Hierarchy

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ABC

Corporate Fund Management

3.1.1.1

Special Organization Consideration

Not applicable in this section

3.1.1.2

Description of Improvement

Not applicable in this section

3.1.1.3

Description of Functional Deficiencies

Not applicable in this section

3.1.1.4

Approach to cover Functional Deficiencies

Not applicable in this section

3.1.1.5

Interface Considerations

Interest rates from the money and capital markets are used to value financial
transactions in Risk Analysis. This requires automatic or manual maintenance of
interest rate tables in the SAP system.
The following rate and price information can be imported to the SAP system:
Exchange Rates
Securities Prices
Reference Interest Rates
Indices
Commodities
Forward rates
Volatilities for the Exchange Rates
Index Values
The analysis can only be as good as the market data that it uses

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ABC

Corporate Fund Management

Reporting
Information System
The information system of the Market Risk Analyzer would contain analysis
functions for Risk Management such as NPV Analysis, Value at Risk Analysis and
GAP Analysis
NPV Analysis:
The following options can be provided for NPV analysis:

Evaluation today based on current market data or scenario data

Evaluation in the future on the basis of forward data generated from


current market data
With NPV analysis for a future date, all cash flows arising after the future
date are discounted back to it, using the forward data for the future data
which is projected from the current market data.

Evaluation in the future based on scenario data

Depiction of the sensitivity of portfolio values or single transactions when


individual market parameters are changed

Value At Risk:
The value at risk is the maximum negative value change of a portfolio that
based on a certain probability will not be exceeded during the time it takes to
secure or liquidate the position

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4.1

Glossary

1. Business Partner: A business partner is a person, group or an organization in which you have a business interest.

Typical business partners include banks or central treasury departments.


2. Business Partner Roles: A marker used to assign functions to your business partner depending on the business

relationship (for example, counterparty, issuer, borrower), and to control field selection for the partner data. A
business partner may have more than one role.
3. Correspondence: A communication that can be printed automatically or manually. Correspondence includes:

i. External correspondence (confirmation letter)


ii. Internal correspondence (dealing slip) related to financial transactions.
4. House Bank:

A business partner that represents a bank through which you can process your own internal

transactions.
5. Key date valuation: Key date valuation is the valuation of transactions or positions for accounting purposes at the

market value on a specific key date. Depending on which valuation principle is used, key date valuation includes
creating or reversing provisions, posting write-ups and write-downs as well as posting unrealized gains and losses.
6. Master Agreement: This refers to the arrangements and conditions that are applied to individual transactions. Some

of the criteria of a master agreement are:


i. Permitted company codes
ii. Term

ABC

Corporate Fund Management

iii. Permitted business partners


iv. Permitted transaction types and the minimum and maximum transaction terms
v. Permitted currencies, including minimum amounts, and the total transaction volume in the respective currency.
7. Standing instructions: Standing instructions are general agreements made with a business partner for processing

transactions of the same type. They include transaction authorizations, payment details for incoming and outgoing
payments and correspondence with a business partner. The standing instructions are proposed as default values when
you enter transactions in the system.
8. Valuation Area: In the financial subledger you can set up different valuation areas in order to value your financial

transactions according to different accounting regulations. Example: Valuation area 1 as per Indian rules, Valuation
area 2 as per US GAAP.

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