Treasury Hedge Currency II
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.
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
Business Function: FIN_TRM_LR_FI_AN
t0: Contract is created
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.
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.
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
Create a Security Account for Hedge instrument
t1. Premium is payed
Post the Premium (Guarantee)
Now the premium is posted, we use Security Product (Prod type 70C) to reflect the fluctuations.
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
FTR_CREATE calls TI5AN
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.
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.
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.
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
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.
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 –
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”
Post the transaction.
Here is an example of Prod type 76A & 70C
Post Derived Business Transaction and create the operation Profit / Loss.
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.
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