SAP International Treasury Management Conference 2009

Workshop 3: Financial Risk Management

Overview

Aniket KulkarniSolution Manager, Treasury And Risk Management SAP AG

June 24, 2008

© SAP 2007 / Page 2

1. Introduction to Financial Risk Management

2. Overview Of Components

3. Overview Market Data

4. Overview Risk Reporting Capabilities

Agenda

© SAP 2007 / Page 3

Financial Risk Management Process

Risk Identification

Risk Quantification Risk Analysis

Risk Management

IdentifyOrigin of Risk:PurchaseSalesInventory etcPlanned ItemsRisk TypeMarketCredit orLiquidity RiskRisk Factors:Foreign ExchangeCommodity PricesInterest rates

Quantify riskMarket RiskExposure to foreign CurrencyExposure to volume Of commodity tradedInterest Rate Risk

Credit RiskExposure to counter-Party

Liquidity RiskLiquidity Gap

Analyze risk Tools:Net Present Value Analysis Sensitivity AnalysisValue at Risk AnalysisCash-Flow at risk

DefineHedge Strategy

ManageHedge managementHedge Exposure With Financial InstrumentMonitor hedge forEffectivenessMonitor impact on P/L And Equity

Risk Reporting And Regulatory ComplianceCompliance Standards: FAS 133, IAS 39, FAS 157, FAS 161, IFRS 7

© SAP 2007 / Page 4

Financial Risk Management in SAP

Forecastedpositions

Sources of Exposures

Accounts Receivable/

Payables

Assets/Inventory

Balance Sheet

ExposureManagementIn TreasuryAnd Risk

Capture Exposures

Hedge Management

TransactionManagement

Risk Analyzers (Central repositoryOf Financial risk key figures)

Market RiskCredit Risk

ReportsOnlineRDB

NPV AnalysisSensitivity Analysis

VaR

Commodity Trade analysisHedge analysis

Liquidity Risk

Risk Analysis and Management Reporting

© SAP 2007 / Page 5

1. Introduction to Financial Risk Management

2. Overview Of Components

3. Overview Market Data

4. Overview Risk Reporting Capabilities

Agenda

© SAP 2007 / Page 6

Transaction Manager

Business-partner

Money MarketSecuritiesDerivativesForexCommodities

REPORTING:Externallymaintained

transactions

General LedgerIntegration

CashManagem.

Analyzers

Market RiskAnalyzer

Portfolio Analyzer

Credit RiskAnalyzer

The SAP modules in Treasury Analyzers

Market DataFX Rates

Yield CurvesIndices

Volatilities

© SAP 2007 / Page 7

Market Risk Analyzer - Risk Controlling

• Online data feed• Simulated• Shifts• Scenarios

Market Data

Pricing EngineNPV,VaR ..

.

EDT

SAP

CMLCM TMExternal

NPV, VaR, Exposures …

Results

Datapool

Analysis/Reporting/Planning

© SAP 2007 / Page 8

1. Introduction to Financial Risk Management

2. Overview Of Components

3. Overview Market Data

4. Overview Risk Reporting Capabilities

Agenda

© SAP 2007 / Page 9

Market Data

T time

Interest rates

Linear or cubic spine Interpolation

Interpolated values

Reference Interest Rate

Reference Interest Rate

Zero Bond Yield

EUR USD

Yield Type Yield Type

Par Yield

Yield Curve Yield Curve

Volatilities (int rate, index, ccy)

Option term

Volatility

30 90

FX Rates

Price

EUR-USD USD-GBP

Security price Index value

Volatility

Security

© SAP 2007 / Page 10

Consolidation LEVEL 1

ConsolidationLEVEL Risk factors

Consolidation LEVEL 2

. . .

3-month 3-month EURIBOR EUR EURIBOR EUR

6-month 6-month EURFIBOR EUR EURFIBOR EUR

12-month 12-month EURIBOR EUREURIBOR EUR

1-year EURIBOR EUR

3-year EURIBOR EUR

SAP Stock

USD Spot

GBP Spot

3-month LIBOR GBP

6-month LIBOR GBP

1-year Swap USD

1-year Swap USD

Money market EUR

Capital market EUR

Stocks

Currencies

Interest GBP

Swap USD

Interest EURInterest EUR

CurrencyCurrency

Interest

Risk Hierarchy

Defining the risk hierarchy and evaluation structure

© SAP 2007 / Page 11

1. Introduction to Financial Risk Management

2. Overview Of Components

3. Overview Market Data

4. Overview Risk Reporting Capabilities

Agenda

© SAP 2007 / Page 12

Market Risk Analyzer - Net Present Value Concept

Market data

Transaction data Calculation Evaluations

Linear Debts Assets ....

Non-linear Options Caps ....

Risk management

Saved market prices Real-time market prices Flexible scenarios Rule shifts

NPV

Risk

Mark-to-market Sensitivities

- Duration- Convexity- Exposure

Crash/stress tests

Price calculator(user exit)

LEVEL 1LEVEL 1Trading: Swaps

LEVEL 1LEVEL 1Trading: Bonds

LEVEL 2LEVEL 2Trading: Interest products

Base portfolioBase portfolioBonds/New YorkBonds/New York

Base portfolioBase portfolioBonds/FrankfurtBonds/Frankfurt

Company Portfolio Profit center Product

2.0

3.04.0

5.06.0

7.0

8.0

9.0

10.0

1 M 2 Y 4 Y 6 Y 8 Y 10 Y

Yield curve 5 (+) Current. yield curve Yield curve 6 (long-term)

© SAP 2007 / Page 13

Market Risk Analyzer - Value at Risk

Historical marketparameters

Calculation Evaluations

Risk management

Market interest rates Exchange rates Stock prices Volatilities Correlations

Historical simulation Monte Carlo

- Full valuation - Delta method - Delta/gamma method

Variance/covariance Backtesting

0

5

10

15

20

25

30

35

40

45

50

< -9

5

< -8

5

<-75

< -6

5

< -5

5

<-45

<-35

<-25

<-15 <-5 <5

< 15

< 25

< 35

< 45

< 55

< 65

< 75

< 85

< 50

0

No. Date NPV Risk Confidence Interval

1 Feb 81 483.9 -134.32 May 81 524.8 -93.3 99.0%3 Mar 80 530.6 -87.54 Feb 90 538.9 -79.25 Feb 80 543.8 -74.36 Feb 74 546.8 -71.3 97,5%7 Jun 82 557.5 -60.68 May 83 559.8 -58.39 Oct 72 560.5 -57.710 Feb 94 562.6 -55.511 May 79 564.2 -53.912 Oct 79 565.5 -52.613 Feb 85 569.1 -49.0 95.0%

Company Portfolio Profit center Product

Transaction data

Bal. sheet Debts Assets ....

Non-linear Options Caps ....

Price calculator(user exit)

LEVEL 1LEVEL 1Trading: Swaps

LEVEL 1LEVEL 1Trading: Bonds

LEVEL 2LEVEL 2Trading: Interest products

Base portfolioBase portfolioBonds/New YorkBonds/New York

Base portfolioBase portfolioBonds/FrankfurtBonds/Frankfurt

© SAP 2007 / Page 14

Results Database: Risk Cockpit

© SAP 2007 / Page 15

Credit Risk Management - Process

Deal

Limit check

O.K.

End-of-day processing

Exposure8.5

632.3688.112.3

Limit10.5700.7716.74.8

PartnerEuro BankUnited BankCarltonBrightline

ReportingUtil. in %

80.9%90.3%96.0%256.3%

Free Limit2.068.428.6-7.5

Limit

Attributableamount

T r a n s a c t i o n

M a n a g

ement

Request

Start of workflow, when limit is ‘Breached’

© SAP 2007 / Page 16

Credit Risk Analyzer - Relative Limits

Can compare same key figures from

different portfoliosOR

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 Utilization Portfolio

Utilization Key Figure

Choose ReferencePortfolio

Reference KeyFigure

Define LimitsPercentage

Define LimitsAbsolute

© SAP 2007 / Page 17

Portfolio Analyzer

Portfolio Analyzer

Building organizational structures

Asset allocation

Performance measurement

Benchmarking

Reporting and revision

Investment strategy Determination of benchmark

Improvement and alignment

Risk adjustment

Business transactionsSAP ERPTRM

© SAP 2007 / Page 18

Performance Analytics – Benchmarking Reporting