Treasury Hedge Currency II

Gustavo_Vazquez · ‎12-22-2015

Currency Hedging is the act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates. Currency hedging is used by financial investors and business to eliminate risks they encounter when conducting business internationally. Hedging can be likened to an insurance policy that limits the impact of foreign exchange risk.

Hedging can be accomplished by purchasing or booking different types of contracts that are designed to achieve specific goals.These goals are based on the level of risk the customer is exposed to and seeking protection from and allow the individual to lock in future rates without affecting, to a great extent, their liquidity.

Hedging can be a very complicated enterprise. The various hedging mechanism range from basic to extremely intrincate.

Scenario

Here is an example of hedging currency in a scenario which combines 2 Treasury Product Types

t0: Contract is created

t1: Guarantee is payed

t2, t3: Monthly Financial Closing

t4: End of the Contract

Between t1 and t4 the Contract suffers form market volatility. The variations above or below the agreed spot rate are credited/debited from the bank account every day, so at the end (t4) you don't have to pay/receive in full the difference, you have done it during the contract.

Start Date: 01.12.2015

End Date: 31.03.2016

Ex Rate: 11,0000

t0 Ex Rate: 10,0000

Requirements: SAP ERP EhP 4 or above

Extension: EA-FS

Business Function: FIN_TRM_LR_FI_AN

FIN_TRM_LR_FI_AN_2

t0: Contract is created

tx: FTR_CREATE

Product Type: 76A

Transaction Type: 100

Business Partner: 3730010 (in this example)

Select your option

Flow Type 1300 is for Profit / Loss Accounts in the Premium. Flow Type 1302 is for Balance Sheet Account.

Exercise Period -> End of Contract

Exercise Type -> European (same date as Exercise Period),

American (Any date between start date and Exercise Period)

Settlement -> Physical (Create a new transacion ; 60A - 101),

Cash Settlement ( Settle in this Transaction )

Points Quot -> The Premium is a fixed amount

Percentage -> The Premiumis a percentage of the Contract

Payment Date -> The day the Premium is payed

Curr -> Premium Currency

Amnt -> Premium Payed (Guarantee)

Go to Underlying tab and complete the contract

Complete the information of the contract

FTR_CREATE calls TI71.

tx: FTR_EDIT

If you want to change the transaction, use FTR_EDIT or TI72

Settle the transaction.

FTR_EDIT calls TI75.

Until now we have created the Forex hedging, but we need a Product Type to register market fluctuations.

We are goingo to create a Security Product to administer this fluctuations.

tx: FWZZ

Product Type: 70C

There are some considerations in this Value:

- Min Price flow: Minimum value the price modifies this value

- Index points: The value in points of the index

- Value: The price for the index point defined in "index point".

in this case, as we are not interested in Index, we can use a 1:1 relationship

- Start of Term: The day the Value starts

- Last traded day: The last day you can trade a Value

- Expiration Date. The day the value ends

Entered but not used

- Securit. Index.: An index to use as a reference (SP&500, Nasdaq, etc). in this scenario there is no index

- Index Point val: The value of Security Index point in Value Currency

- Crcy IndexPoint : The Currency of the Sec. Index Point

In Exchanges tab, complete the market

Save the Value

tx: TPM4

Create a Security Account for Hedge instrument

t1. Premium is payed

tx: TBB1

Post the Premium (Guarantee)

Now the premium is posted, we use Security Product (Prod type 70C) to reflect the fluctuations.

tx: FTR_CREATE

Product Type: 70C

Transaction type: 400

ID Number: HEDGE_CURR

Sec. Account: HEDGE_ACC

Payment Date: 03.12.2015

Number of units: 1.000,00

Price. 11,00000

FTR_CREATE calls TI5AN

tx: TBB1

Product Type 70C doesn't need to be Settled.

When you run TBB1 it changes the Position Status from P (Planned) to F (Fixed).

From t1 to t2

During this period you register market fluctuations. The Bank account is credited/debited if the market price is above or below spot rate.

You enter market price with tx FW17. The daily variation is calculated with tx PMVM.

tx: FW17

tx: PMVM

The variation between 03.12.2015 and 04.12.2015 is 0,0154 and this is reflected on the FI document.

Next day 07.12.2015 the next value is 11,0150 so the variation is -0,0004

All variations are reflected on the Bank Account.

t2, t3: Period Closing

At the end of month (or year), you prepare the Financial Closing process and FSCM-TRM is part of it.

One of the processes involved is valuation. You will valuate your asset with the value at the end of period.

tx: TPM1

Nominal Value: 11,05

Key Date: 31.12.2015

In TPM1 you set your G/L Asset Account from PMVM to 0 and send the accumulated variations to Profit/Loss Account.

If you do Valuation without reset, the journal entry on 01.01.2016 is not created.

t4: End of Contract

At the end of the contract you have 2 transactions to close, 76A & 70C.

As the sum of daly variations of Market Valuations represents the difference between spot rate and close rate of the contract, Product Type 76A should have no Proft/Loss but it will be posted by Product Type 70C.

tx: PMVM

Post the variation of the last operations day (31.03.2016)

At 30.03.2016 the price is 11,4975. At 31.03.2016 the price is 11,5000. If we have 1.000,00 units the variation is

1.000,00 * ( 11,5000 - 11,4975 ) = 2,50

tx: FTR_CREATE

Sell the position in HEDGE_CURR with Prod type 70C - 500 on 01.04.2016

The Price is the same as the last day of the Contract. Price: 11,5000

In case the Security Class ends the last day of the month, the reclassification from Asset to P/L Account will be done by TPM1 and the next month it will be definitively posted with TPM18.

Example:

31.03.2016 tx: PMVM (Last Operations Day)

40 Bank Incoming 2,50

50 Other Asset 2,50-

tx: TPM1 (Accumulated P/L)

40 Other Asset 500,00

50 Incoming Ex.Rate 500,00 -

01.04.2016 tx: TPM1 (Reverse Valuation)

40 Incoming Ex. Rate 500,00

50 Other Asset 500,00 -

tx: TPM18 (Derived Business Flow)

40 Other Asset 500,00

50 Incoming Ex. Rate 500,00 -

tx: FTR_EDIT

Change the settlement for transaction 76A from "Physical Exercise" to "". FTR_EDIT calls TI72

Exercise the transaction. FTR_EDIT calls TI86

Settle the transaction. FTR_EDIT or TI75.

In case the transaction doesn't post because of "0" PaymtAmt, you will have to use Settlement "Physical Exercise"

tx: TBB1

Post the transaction.

Here is an example of Prod type 76A & 70C

tx: TPM18

Post Derived Business Transaction and create the operation Profit / Loss.

Additional Information:

In case you recover the Guarantee, you need to create a new transaction with Prod Type 76A - 200 and sell your Foreign Exchange Position with the same values as the created in t0. In this case Settlement is "Physical Exercise". Post the transaction (tx TBB1) and Exercise it (tx TI86) creating a subsequent transaction (Prod Type. 60A -101 ), but after you created it you have to reverse.