In my previous blog, I had described about the capabilities of SAP Treasury and Transaction Manager. A closely linked module to it is Risk Management whose features are getting increased in every release to make it a comprehensive package. The reason being it is the same risk management component that is being used in bank analyzer and when it comes to bank, it can’t be just an ordinary solution. Whole of banking solution is dependent on financial risk management and hence we can expect further more activities in this space to cater to banking need across demography.
Using Treasury Transaction Manager - We invest in what is known as treasury markets where we have various sources of income known as treasury instruments. Let us take a case where we require cash to pay a vendor in 45 days. 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 Analyzer
Market 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.
SAP supports various risk models and also various risk management methods like simulations, NPV (Net Present Value) analysis, VaR Analysis (Value at Risk) everything at the portfolio level.
Credit Risk Analyzer
Credit 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 counterparty or for a instrument line or virtually any dimension or a combination of dimension. We also define the probability of default.
I will continue with this series of SAP Treasury capabilities with an overview of SAP In-House Cash and Bank Communication Management. You can check the previous blogs (SAP Financial Supply Chain Management & SAP Treasury, An Overview of SAP Treasury) in this series and also the wiki section for more details on SAP Treasury.
