Treasury - Risk ManagementLink to Content's target Space :[http://wiki.sdn.sap.com/wiki/display/ERPFI/Treasury+and+Corporate+Finance+Management|../../../../../../../../../display/ERPFI/Treasury+and+Corporate+Finance+Management||\||] Applies to:SAP ERP 6.0, SAP for Banking SummaryTreasury Department of any organization is going to be involved in managing financial risks. There are risk guidelines for every organization, but the most important part of managing financial risks is going to be quantifying those risk. This wiki aims at giving an overview of the Analyzer modules of SAP. Author: Table of Contents Treasury & Risk ManagementWhen we speak of Treasury the prime objective is to optimize the financial supply chain and ultimately save cash. What do we do with saved cash? It is a cycle. We either invest it back in the business. But not always will this be optimum. We do sometimes invest in what is known as treasury markets where we have various sources of income known as treasury instruments. This is a very rough example but this is for easier understanding. Let us take a case where we require cash to pay a vendor in 45 days time. We have excess cash currently in hand currently. So for these 45 days we can invest in a fixed deposit so that we earn interest for those days. There are various instruments available to invest our cash in. Let us assume that we invest in a deposit with variable interest rate or what is known as floating interest rate which keeps changing over time. Now this interest is vulnerable to changes in the market or in simple terms it is liable to change based on certain conditions. This change can be either upwards which is going to result in gain or downwards which is going to result in a loss for us. Thus there is a risk involved in this. In Risk management we are going to quantify this risk and thus manage our risk effectively. There are multiple risks involved which are going to be broadly divided into Market Risks, Credit/Counterparty Risk, and Operational Risk etc. Market Risk is going to be managed through Market Risk Analyzer *component and Credit Risk is going to be managed through {}Credit Risk Analyzer*. Operational risk will not be managed by Treasury Department and hence will not come under Treasury and Risk Management. But it is important to understand that all the risks are interrelated and from an organization perspective, the risks will be managed at the wholesome level. There is another component called Portfolio Analyzer which is going to help us calculate the overall risk over a portfolio meaning a range of investments across different instruments. This is going to help us provide a wholesome view of risks involved across a range of investments. Market Risk AnalyzerMarket Risk is further sub classified as Interest Rate Risk, Foreign Currency Risk and Stock Price Risk. There are various notations used by different players, but this is the general market risk classification. SAP will take care of identifying and managing all these risks in Market Risk Analyzer. We have what is known as Risk hierarchies and portfolio hierarchies where we define upto what level we want the risk to be analyzed. The least level upto which we can analyze the risk is the actual individual financial transaction. The risk can be analyzed in different dimensions and each transaction which is known as financial objects can be analyzed in different dimensions like interest rate risk and forex risk etc. This is something which makes SAP a highly sophisticated tool for risk management. Credit Risk AnalyzerCredit Risk is something which is going to quantify the risk involved if the counterparty is going to fail in paying the financial obligations on a contract. This can be due to the counterparty himself or due to the country risk involved. All these can be managed effectively in Credit Risk Analyzer through Limit Management where we can set limits in various dimensions. We can set limits for a counterparty or for a instrument line or virtually any dimension or a combination of dimension. We also define the probability of default. The major advantage with SAP is its automatic and close integration with other components of SAP include Accounting modules and also the overall risk management of a company. This seam less integration with all components along with the features available in SAP Treasury and Risk Management makes it an on par solution with the best in class product available in market. Related Content http://help.sap.com/saphelp_erp60_sp/helpdata/en/ed/de6939a49e623fe10000000a114084/frameset.htm |
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Comments (2)
Nov 26, 2010
Ravishankar Ramamurthy says:
Hi, Kindly move this page under ERP Financials - Treasury & CFM. Regards, ...Hi,
Kindly move this page under ERP Financials - Treasury & CFM.
Regards,
Ravi
Jul 09, 2012
monfera says:
Just a small clarification: it's interesting that there can be an opposite view ...Just a small clarification: it's interesting that there can be an opposite view on interest rate risk relative to the cited example:
"There are various instruments available to invest our cash in. Let us assume that we invest in a deposit with variable interest rate or what is known as floating interest rate which keeps changing over time. Now this interest is vulnerable to changes in the market or in simple terms it is liable to change based on certain conditions. This change can be either upwards which is going to result in gain or downwards which is going to result in a loss for us. Thus there is a risk involved in this."
If the Treasury buys a liquid fixed interest rate product and the next day the interest rates go up, then it it is undesirable by the Treasury, even if the interest amount at the end of the maturity does not change. The reason is that the value of the asset will go down - a rational investor will no longer offer as much for the product, because now he can invest the same amount at a higher rate.
The conclusion is that what represents risk for the company under the Q probability measure is dependent on the preferences (risk aversion, goals etc.), preexisting portfolio and the stochastic probability density of future possible portfolios and business environments. So the cited example will also be applicable for a lot of Treasuries, but not all.