4. Transaction Manager: Foreign Exchange Trading

Unit Overview

In this unit, you will learn about the financial instruments provided by the Transaction Manager in the area of foreign exchange, and how these can be used to hedge against currency risk (foreign exchange). The architecture and functionality of the parallel valuation areas that you can use to map a number of accounting princTiples in the subledger and general ledger are also explained.

In addition to this, the tools for preparing and executing key date valuations are also introduced.

Unit Objectives

After completing this unit, you will be able to:

• Name the product types in foreign exchange trading and the most important business operations and functions in Trading, Back Office, and Accounting

• Process delta view in connection to money market

• Perform front-office processing for a spot or forward transaction and a foreign exchange swap.

• Transfer the flows from the foreign exchange transaction to Financial Accounting using the accounting functions

• Prepare and execute a key date valuation

• Standard reporting for FX transaction

Unit Contents

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4.1 Lesson: Introduction to Foreign Exchange Trading

Lesson Overview

This lesson provides an initial introduction to foreign exchange trading.

Lesson Objectives

After completing this lesson, you will be able to:

• Name the product types in foreign exchange trading and the most important business operations and functions in Trading, Back Office, and Accounting

• Process delta view in connection to money market

Business Example

Now that you have learned about the Trading area and the important tools for settling transactions in Money Market, you want to acquire an overview of the Foreign Exchange area.

What instruments can you use to hedge against interest and currency risks and how are these entered in the system?

How do position management and valuation of financial transactions in accordance with one (or more) accounting rules work, and how is this transferred to the general ledger?

How can you make payments and create payment media?

Foreign Exchange Product Types

Forex trading includes the following product types:

• FX spot, forward, swap
• Non-deliverable forward
• FX option

Foreign exchange is traded as strategic investment (speculation) or as hedging instrument. Different product are use (posting, valuation).

Transaction Management

The standard basic structure of the trading and transaction management processes forms the basis for integrating and processing activities within the SAP system and provides the framework for adapting the way transactions are represented in the system to meet specific company requirements.

You can grant user authorizations for the various activities in the transaction and position management process. The authorization concept is specifically designed to allow you to assign different authorization profiles to employees in different organizational areas. This enables you to separate Trading, Back Office and Accounting functions.

You determine whether a special posting release is required for each product or transaction type.

You can create user authorizations for activity transitions.

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4.2 Lesson: Front Office Functions

Lesson Overview

This lesson presents the foreign exchange trading functions.

Lesson Objectives

After completing this lesson, you will be able to:

• Perform front-office processing for a spot or forward transaction and a foreign exchange swap.

Business Example

Trading foreign exchange spot, forward and swap transactions.

Spot Exchange/Forward Exchange Transaction

On the entry screen, you enter further transaction data for contract conclusion, currencies, payment amounts, rate, value date, and so on.

For transactions with two foreign currencies, you can calculate the rate using the cross-rate calculator. You call this by choosing Extras → Cross-rates.

You can branch from here to the general transaction management entry screens. Tab strips help you navigate between the screens.

Administration Information about portfolio assignment, account assignment reference for position posting.

Other Flows The flows generated automatically can be supplemented by other flows (charges, commissions, and so on).

Payment Details Enter payment details that are relevant for this transaction.

If the payment details are maintained as standing instructions for a business partner, they appear as default values.

You can use Memos to store additional information for each activity.

Other available functions include fast processing, collective processing, rollover, premature settlement, reversal, transaction history, and deadline monitoring.

Cash Settlement - Foreign Exchange

The Cash Settlement function enables you to enter cash settlements for foreign currency transactions. The main flows are then locked for posting.

For the cash settlement, the current rate is drawn from the rates table. The values can be changed manually, however.

If you want to use the Cash Settlement function, you have to set the corresponding indicator when making the Customizing settings for the product type.

For Foreign Exchange transaction the following exercise types are available:

• Cash Settlement (only a settlement amount is posted into FI)
• Physical Delivery (the nominal amounts at due date are posted into

Forex Swap

In the Spot days field (see Define Leading Currency), you can define the number of days between the conclusion of the contract and the value date of the forex transaction.

As a rule, the number of working days is 2. This can vary depending on the currency pair being traded. You should only make an entry here if a rule other than 2 days applies to a particular currency pair in the international foreign exchange market.

If the Date string indicator is set (see Define User Data), the date strings you enter (for example, ++1 for one month) in the value date fields in forex and forex option entry are interpreted and calculated from the spot day and not from the date of conclusion of the contract.

Example:
The contract is concluded on 08.03.YYYY.
The Date string indicator has not been set. If you enter +2 for the currency pair EUR/USD, the system calculates the date as 10.03.YYYY.
If the indicator is set, the system calculates the date as 12.03.YYYY.
The forward rate is automatically determined by way of a markup or markdown. Like the payment details, the conditions for the authorized business partners correspond to those of the spot and forward transactions. Easy-to-handle copy functions enable you to speed up data entry. You can use these to copy data from the first transaction (spot and/or forward) to the corresponding field of the second transaction (forward and/or swap).

Internal foreign exchange trading function

T.Code TX10

• Process for entering foreign exchange transactions locally from the perspective of the company code entering the transactions.

• Automatically generated exchange rates

• Automatic creation of "mirror transactions"

• "Exchange rate overview for internal foreign exchange transactions"

Internal Foreign Exchange Trading is a process for entering foreign exchange transactions locally from the perspective of the company code entering the transactions.

A subsidiary company can use the transaction closing function to request an automatically generated exchange rate for a foreign exchange transaction (spot exchange, forward exchange, foreign exchange swap) from the head office. You can accept this exchange rate and close the transaction.

When the transaction is concluded, a transaction is automatically created from a head office perspective in the company code of the head office. You can also create this transaction in the company code of the subsidiary as a mirror transaction.

As well as entering internal foreign exchange transactions, you can also use the report Exchange Rate Overview for Internal Foreign Exchange Transactions. This gives you an overview of the current exchange rates for each currency. You can also use this report to check that Customizing and the market data are complete.