SAP FSCM TRM (TREASURY AND RISK

EBOOK MANAGEMENT)

SAP FSCM TRM -

DEFINE ADDITIONAL
HEDGE MANAGEMENT
ELEMENTS IN SAP
HEDGE MANAGEMENT
AND ACCOUNTING

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Contents
Define Additional Hedge Management Elements ........................................................................ 3
Effectiveness Test Method ...................................................................................................... 10
Update Types for Hedging Business Transaction .................................................................... 11
Product Types for Exposure Subitems .................................................................................... 13

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Define Additional Hedge Management Elements

Figure 1-Define Hedging Profile

The Hedging Profile is a central customizing entity of Hedge Accounting for Positions which
holds information about how to process Hedging Relationships.

The Hedging Profile is a customizing entity which contains all the parameters that control the
Hedge Accounting process, i.e., entry and management of the hedging relationship's header
data, the execution of valuation on the contract date, the hedging scenario, the type of
documentation to be generated, and the rules of the effectiveness test.

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Below are some of the fields set in the definition of a hedging profile:

• Scenario: The hedging scenario contains the complete Hedge Accounting logic, i.e., the
type of hedge involved (e.g., fair value hedge, cash flow hedge), product categories
supported in the hedging scenario, permitted cardinalities of hedged items for hedge
transactions, option of a rollover, and effect of Hedge Accountings on valuation for
accounting purposes.
• Test Plan Category: Contains a list of points in time during the term of a hedging
relationship when effectiveness tests can or must be performed.
• Prospective Effectiveness Method and Retrospective Effectiveness Method fields - All
settings used for effectiveness tests.
• Effectiveness testing for derived business transactions.
• Hypothetical derivative category - For cash flow hedges, this parameter controls whether
the hypothetical derivative is to be created with a net present value of zero or with the net
present value of the hedging instrument at the time of designation.
• Effectiveness testing validity period - The validity period for the effectiveness test indicates
the maximum permitted period (in days) for an effectiveness test, which applies when the
valuation for accounting purposes searches for the effectiveness tests of a hedging
relationship before applying the hedge accounting rules.

The hedging profile is defined in SAP customizing under the path Financial Supply Chain
Management → Treasury and Risk Management → Transaction Manager →General Settings
→ Hedge Accounting for Positions → Settings for Automated Exposure Item Hedging (FX Risk)
→ Define Hedging Profile.

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Figure 2-Define Hedging Profiles

With the exercise of a FX Option an underlying FX Spot Transaction is designated into the
existing Hedging Relationship:

The Hedging Profile definition is enhanced by an additional attribute 'Hedging Profile

Underlying'.

The 'Hedging Profile Underlying' determines the Hedge Accounting Rule of the underlying for
Component Calculations at FX Option Exercise and Classification at Period End Close.
Customizing path: Financial Supply Chain Management → Treasury and Risk Management →
Transaction Manager → General Settings → Hedge Accounting for Positions → Define Hedging
Profiles.

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Whether hedge documentation is created or not is driven by settings in the Hedging Profile.
Hedge Documentation is created only if flag ‚Semi Automatic Documentation is activated.

Under Documentation Handling, you can set documentation as optional by selecting the
Documentation Optional checkbox. If you make this setting, documentation is not a
prerequisite for the release of the designation.

To ensure that documentation is created for the designation, do not select the Documentation
Optional parameter in the profile of the hedging relationship. This means that you can now fix
and post a designation transaction only if documentation exists for this transaction. SAP
provides Adobe template forms that customers can copy to create their own

Hedge Documentation form. Below are the two SAP delivered Adobe hedge documentation
forms:

• FX Forward: TR_F_THX_NOTE_HREL_FXRISK_FX
• FX Option: TR_F_THX_NOTE_HREL_FXRISK_OP

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SAP provides Hedge Documentation templates as .pdf form for FX Forward and FX Options as
Hedging Instruments to be copied and adapted to meet customer's needs.

The creation of Hedge Documentation is included as an additional process step with the
Release of the Hedging Relationship. The Hedge Documentation is created automatically and
can be accessed in the Manage Hedging Relationships (TPM100).

Note

As the creation of the Hedge Documentation is part of the automated processing it can not be
changed manually in the Manage Hedging Relationships. The Release of the Hedging
Relationship needs to be reversed; this changes the status of the Hedge Documentation to
revoked.

As a reminder, for a hedging relationship, the Hedging Profile is derived from these steps:

The Hedging Classification entered in the trade determines the Hedging Area.

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The settings in the Designation Control section on the Hedge Accounting II tab of the Hedging
Area are used to derive the Hedging Profile based on a combination of the following criteria:
Company code on behalf of which the financial transaction is created

• Valuation area
• Hedging classification

The Hedging Scenario is not configurable (it is defined by SAP) but it is worth pointing out in
more detail.

The Hedging Relationship Scenario is a system defined entity which holds information about:

• Hedging Relationship Category: Cash Flow Hedge / Fair Value Hedge / Net Investment
Hedge.
• Hedged Item Category: Planned Forecast / Balance Sheet Item.
• Hedge Accounting Rule (see below).
• Risk Details: Currency Risk.

It is the Hedge Accounting Rule specified in the Hedging Relationship Scenario determines how
the amounts of Hedging Reserve and Cost of Hedging Reserve are calculated.

Hedging Reserve: Designated Component.

Cost of Hedging Reserve: Non-designated Component.

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Rule for Calculating Cost of Hedging Reserve:

• The result of the ‚Cost of Hedging Reserve Calculation Rule' check determines the
calculation and posting of the measurement result of ‚Cost of Hedging Reserve (OCI II).
• Depending on the assigned Hedge Accounting Rule, the relevant elements and/or
components of the hedging instrument (actual values) are compared against the
corresponding values of the hypothetical derivative (aligned values).
• One of the following calculation rules is then applied to determine the amounts that are
posted to the cost of hedging reserve:
1. Actual Value = Aligned Value The change in the amount of the actual value is posted to
the cost of hedging reserve.
2. Actual Value = Aligned Value The change in the amount of the actual value is posted to
the cost of hedging reserve.
3. Aligned Value > Actual Value The cost of hedging reserve is determined based on the
lower-of test. The smaller amount of the actual and aligned value is posted to the cost
of hedging reserve, and the remaining amount is posted to the P/L statement.

Example:

If the hedge accounting rule 611 was assigned to the hedging scenario, the calculation rule of
the cost of hedging reserve is determined based on the comparison result of the following
elements:(Forward + CCBS) of the hedging instrument vs. (Forward + CCBS) of the hypothetical
derivative.

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Effectiveness Test Method

In the Effectiveness Test Method customizing activity, the effectiveness test methods are
defined. The Effectiveness Test Methods are then assigned in the Hedging Profile. It is then the
Hedging Profile that is assigned to the hedging relationship and driving the effectiveness test
settings for the hedging relationship.

The main take aways from this slide are that the effectiveness test methods are configurable,
they are set in the Hedging Profile, and SAP supports the most basic effectiveness test such as
the Dollar Offset method to linear regression with Market Data Scenarios (MDSs), which allow
for many market data scenarios to be tested and factored into the effectiveness testing. This is
a sort of stress test within the effectiveness test.

Whether an effectiveness test is based on period-to-period or cumulative is specified in the

definition.

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Lastly, if linear regression is used, the parameters of the linear regression are specified in the
effectiveness definition.

Customizing path: Financial Supply Chain Management → Treasury and Risk Management →
Transaction Manager → General Settings → Hedge Accounting for Positions → Effectiveness
Test → Effectiveness Test Method.

Update Types for Hedging Business Transaction

The Hedging Business Transactions are designate, de-designate, classify, reclassification, swap
transfer, etc. These business transactions are used in position management to track the
business transactions. Hedge Accounting interacts with the other components in position
management by triggering Derived Business Transactions in some cases. Key actions in Hedge
Accounting generate original business transactions (designate, de-designate, classify, etc.),
which trigger Derived Business Transactions. For example, designation and de-designation are

original business transactions with associated derived business transaction flows, such as
original transactions of transaction or position management.

In addition, specific to FX options, de-designation transfer and designation transfer are two
Hedging Business Transactions.

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• Dedesignation Transfer: Transfer out component values from exercised FX Option.

• Designation Transfer: Transfer in component values to underlying FX Spot/Forward
Transaction.

In this customizing step, associated update types are defined and assigned for each of these
Hedging Business Transactions.

Update types used in hedge management position management are defined (1) and then
assigned the usage Hedge Accounting for Positions (2). For the assignment of update types for
Hedging Business Transactions, the update types are assigned at the product type level (3).

As mentioned, the update types defined here are used for position management and do not
transfer to the SAP general ledger. The business transaction, e.g. reclassification, is triggered
using the updates types defined here then a corresponding Transfers derived business
transaction flow is created and posted to the SAP general ledger.

For example, when the sub-position is created within the designation, classification, etc., the
position components that exist at this point in time are transfer posted in accordance with the
nominal values. A derived business transaction is generated for the relevant original business
transaction, which, like all other derived business transactions, is configured in customizing. It
is the corresponding derived business transaction flow is created and then posted to the SAP
general ledger.

For more information on the derived business transaction settings related to hedge
management, please see the lesson on Hedge Management Account Determination.

Define and assign the usage for the Hedging Business Transactions by following the IMG path
Financial Supply Chain Management → Treasury and Risk Management → Transaction
Manager → General Settings → Hedge Accounting for Positions → Update Types → Define
Update Types and Assign Usages.

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Define and assign the usage for the Hedging Business Transactions by following the IMG path
Financial Supply Chain Management → Treasury and Risk Management → Transaction
Manager → General Settings → Hedge Accounting for Positions → Update Types → Assign
Update Types for Business Transactions (P-HA) to Product Types.

Product Types for Exposure Subitems

The Exposure Subitem represents the hedged portion of an Exposure Item within a hedging
relationship and is specified in the Hedging Area definition.

A Product Category ‚Exposure Item' is introduced to enable Position Management and

Accounting Processes on Exposure Subitem level. The Exposure Subitem represents the
hedged portion of an Exposure Item within a hedging relationship. The product category 991
must be used for the subitem product type.

The product types for exposure subitem product type are defined in the SAP customizing by
following the path Financial Supply Chain Management → Treasury and Risk Management →
Transaction Manager → General Settings → Hedge Accounting for Positions → Settings for
Automated Exposure Item Hedging (FX Risk) → Define Product types for Exposure Subitems.

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The exposure subitem requires the same definitions, such as a position management
procedure that is defined and assigned, a default general valuation class, an account
assignment reference, etc., as would be required for a new product type in Transaction
Manager

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