Using Money Market Functions

In this lesson we will describe the Debt and Investment Management Process and the tasks of the different departments during these process steps. We will also look at different deal creation options and an overview of the existing product types and product categories that are used to create deals. Finally, we will walk through a step-by-step explanation of how to create a deal and describe the functionality of the Treasury Executive Dashboardas well.

Your company purchased a corporate bond. The treasury department wants to hedge against the risk of future interest rate volatility and decided to use an Interest Rate Instrument for this purpose.

The Debt and Investment Management process is a major process of the Treasury and Risk Management solution.

• The investment or borrowing of funds.
• Management of facilities.
• The purchase and sales of securities and therefore products of the areas Money Market and Securities.

Financial Market: A financial market is a market that brings buyers and sellers together to trade in financial assets, such as stocks, bonds, commodities, derivatives, and currencies. The purpose of a financial market is to set prices for global trade, raise capital, and transfer liquidity and risk.

Although there are many components to a financial market, two of the most commonly used are money markets and capital markets:

• Money markets are used for a short-term basis, usually for assets up to one year.
• Conversely, capital markets are used for long-term assets, which are assets with maturities of greater than one year. Capital markets include the equity (stock) market and debt (bond) market.

Together, money markets and capital markets comprise a large portion of the financial market and are often used together to manage liquidity and risk for companies, governments, and individuals.

Product Categories are provided by SAP. They determine the product functions and capabilities. Product Types are delivered as sample Product Types with the solution. New Product Types can be added.

The product categories cannot be enhanced or altered. But they offer configuration alternatives as soon as the product types are configured. The product configuration allows you to define mandatory process steps (for example, with or without settlement) or allows you to configure fixed values or available selections (for example, for Accounting).

Deposit as notice: Fixed-term deposit trading (including overnight money and euro money) incorporates the transaction types fixed-term deposit investment and fixed-term deposit borrowing. If the authorized business partners and corresponding payment details are already defined in the system, the only necessary entries are the structure characteristics and conditions. When trading with deposits at notice, investments and borrowings are made without defined due dates. The period of notice, the payment date, and the interest payment cycle are entered, in addition to the amounts and conditions.

Create IR Instrument: You use this app to create interest rate instruments. For variable interest conditions, you need to have defined the relevant reference interest rates in the Define Reference Interest Rates configuration activity in your configuration environment. Furthermore, the current values of the reference interest rates must be entered regularly in the market data table.

Create Fixed Term Deposit: A time deposit is a fixed-term deposit investment that involves the deposit of money to an account at a financial institution. Time deposit investments usually have short-term maturities of one month to a few years and have different minimum deposits. When purchasing a time deposit, the investor must understand that they cannot withdraw their funds until the term has expired. In some cases, the account holder can allow the creator to give early notice or withdrawal if they give notification over several days. A penalty for early termination is also proposed.

Create Commercial Paper: Commercial Paper transactions are transactions on which no interest payments are made during the term of the transaction. Instead, two business partners agree on a repayment amount to be repaid to the investor by the borrower at the end of the life of the contract.

Create Facility: Facilities are agreements between a lender and a borrower that control the general conditions for a series of drawings against a credit line. The lender can give drawing authorization to several people (borrowers), who are entitled to draw varying amounts at any time up to the total approved credit line. The utilization of this credit option for a facility is called a drawing. The lender calculates charges for the borrower (commitment interest). The charges that incur are calculated according to different methods.

Create Current Account Style Instrument: Current account-style instruments are similar to Interest Rate Instruments. The difference between the two kinds of instrument lies in the fact that the current account-style instruments support negative nominal while the interest rate instruments do not, and that the current account-style instruments only support final repayment while interest rate instruments support final repayment, installment repayment, and annuity repayment.

• Product Type - Describes the Product (= kind of deal). Product Types are delivered as sample Product Types with the SAP solution. New Product Types can be added.
• Transaction Type - in many cases describes the value flow (Inflow/Outflow or Buy/Sell)
• Business Partner - the Business Partner the deal is concluded with. Usually the house bank or a broker.
• Flow Type - stands for the contracts value flows. They are derived from the contracts conditions captured in the Structure tab.
• Interest Category - describes the type used for the interest. The options are: Fixed, Variable, Amount, Scaled (Interval), and Scaled (Incremental).
• Interest Calculation Method - describes the method used for the interest. Examples are: act/360, 360/360, or act/365.
• Direction - describes whether the transaction is an inflow or outflow.

The Treasury Executive Dashboard provides business critical KPIs in areas such as Liquidity Management, Counterparty Risk and Indebtedness. Treasury Managers use the information from the dashboard for informed decision making.

The cash manager in your company needs insight into the historical trend of reference interest rates and foreign exchange rates for the past 6 months, for this you need to be able to provide an overview of the treasury executive dashboard.

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Money Market Transactions