Chapter 6

Integrated Treasury Management Example Process

Integrated Treasury Management

Example Process
The transaction and position management process in Treasury Management is the
core element of an integrated Treasury solution. The treasurers planning decision
is just one link in a chain of sub-processes which begins with data collection and
analysis and ends with monitoring and reporting. Interactions between these elements make Treasury into a complex feedback loop comprising planning, management and monitoring functions.

Fig. 6-1: Treasury process

The need to safeguard liquidity and observe external and internal risk guidelines
represents a significant restriction when it comes to concluding financial transactions in the trading area. This underlines the importance of financial planning in
Cash Management and exposure analyses in Risk Management, which provide a
sound information base for selecting appropriate financial instruments. Our (simplified) example shows how the Treasury system can be used to hedge against
DEM risk on a monthly basis.

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Integrated Treasury Management Example Process

1. Acquisition of Current Market Data

Because in the dynamic world of financial markets, up-to-the-minute information
is essential, SAP Treasury provides you with the means to access a realtime datafeed. You can either call up the datafeed manually, or let it supply you with current market data automatically. The data you need is written to the market data
buffer or the operational SAP tables in the R/3 System.

Fig. 6-2: Data acquisition

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Integrated Treasury Management Example Process

2. Analysis of the Liquidity Situation in Cash Management

For the month of February, Cash Management displays a deficit in DEM for operational business, amounting to a total of approximately 12.94 million DEM. At
the current middle rate of 0.5619, this is the equivalent of 7.27 million US dollars.

Fig. 6-3: Liquidity analysis

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Integrated Treasury Management Example Process

3. Identifying the Currency Risk

Having looked at the short-term liquidity situation, you now want to see an overview of your forex exposure over the last twelve months. In Market Risk Management you can select any currencies and maturity intervals you wish and compare
the operational underlying transactions with the hedging transactions entered in
Treasury Management. The open items reflect the remaining exposure. If required, you can discount the operational cash flows from Cash Management to the
valuation horizon.

Fig. 6-4: Exposure quantification

4. Simulating Alternatives in Market Risk Management

You decide to hedge part of the open position (10 million DEM). For this purpose,
you simulate two alternatives in the planning and analysis area of Risk Management:
A forward exchange transaction of 10 million DEM with a forward rate of
0.5630.
The purchase of a currency option (call, European), nominal value 10 million
DEM, with a strike price of 0.5600.

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Integrated Treasury Management Example Process

You set the maturity of both transactions to the middle of the month, February 15.
(the operational cash flows in the analysis are summarized to this date). To fully
analyze the impact on the effective rate (the theoretical DEM value, calculated by
adding the financial transaction to the operational payments) you additionally
select two scenarios which demonstrate widely diverging DEM developments.
Based on current market data or a rising DEM, the forward transaction is the more
favorable alternative; the option would be more expensive due to the premium
which has to be paid. Since traders anticipate a falling DEM and you could profit
from this development with the option, you decide that the option is the alternative which suits you best.

Fig. 6-5: Decision support

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Integrated Treasury Management Example Process

5. Entering the Option in Foreign Exchange

Once you have concluded the transaction, you enter the option in Foreign Exchange. While you enter the option data, you can use the option price calculator to
check the quotations.

Fig. 6-6: Trading support

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Integrated Treasury Management Example Process

6. Confirming and Settling the Forex Option

You create letters of confirmation for the transactions entered in the trading area
and automatically fax these to your business partners. Once you have received
the counterconfirmation, and the responsible trader has checked and signed it (if
appropriate), you enter the received correspondence data into the system. At this
point, the R/3 System automatically compares the entered data with the transaction data. Both the outbound and inbound correspondence is stored in the management data of the transaction. Next, the back office settles the forex option. You
can call up all transactions requiring settlement in the collective processing function,
which helps to ensure that all transactions are processed. The payment details for
posting the option premium were automatically proposed in the transaction via
the standing instructions for the specified business partner. The system displays
the payment amount of the premium in Cash Management as soon as the transaction is entered.

Fig. 6-7: Settlement and correspondence

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Integrated Treasury Management Example Process

7. Controlling the Risk

All information needed to check the impact of the concluded transaction is available as soon as the option is entered in Treasury Management. By calling up the
forex exposure report again, you can see that the option has reduced the DEM
risk. Note that only the option delta (that is, the option value multiplied by a
factor which expresses the reaction of the option to changes in the underlying
transaction, or the DEM) is considered in the exposure analysis.

Fig. 6-8: Risk transformation

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Integrated Treasury Management Example Process

8. Posting and Paying the Option Premium

Once the settlement is saved, you can post the premium of the forex option (unless the posting has to be released first). Because account determination is automatic, no manual entries are required in the posting run. The expense posting
against a bank clearing account is later offset by debiting the bank account when
the electronic account statement is imported to Cash Management.
You can automatically generate the payment medium you require using the stored
payment details and the connected payment programs.

Fig. 6-9: Integrated financial accounting and payment processing

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Integrated Treasury Management Example Process

9. Monitoring the Option

With the help of a maturity schedule, you check the exercise or payment dates of
your financial transactions over a chosen time period. You can activate the necessary transactions directly from the list. If you and your business partner have
agreed physical exercising of the option, the underlying transaction is automatically generated when the option is exercised. On February 15. therefore, 10 million DEM (at the strike price) would be bought in dollars in a spot transaction.
This spot transaction in turn would then pass through the assigned transaction
management process.

Fig. 6-10: Deadline monitoring / Settlement

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Integrated Treasury Management Example Process

10. Mark-to-Market Valuation

You can take a look at the market value of the transactions you have concluded
such as the options due in a certain period at any given time. The relevant data
is available for evaluations as soon as you enter the forex option in the system.

Fig. 6-11: Valuation

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Integrated Treasury Management Example Process

11.

Reporting

To effectively manage and control your enterprise or its individual areas, you need
to be able to extract, edit and analyze your transaction data. Moreover, you need
to be able to analyze both individual transaction data and summarized information for global or cross-area controlling. SAP Treasury meets these requirements by
providing numerous standard reports as well as a drilldown reporting tool which
you can use to generate your own reports and create a report hierarchy.

Fig. 6-12: Management reporting

The SAP Treasury components provide all-round support for your Treasury processes
from preliminary work through transaction entry and settlement to transferring the data
to Financial Accounting. System-wide access to a common database, together with flexible control and reporting functions, ensure effective monitoring and control of entered
risks.

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