Futures–Valuation of a Position in a Foreign Currency

In this, I try to make an attempt to explain the valuation logic for futures in SAP where the position currency is different from the valuation currency (read…..Local Currency). I am not sure whether I will succeed. But anyway here it goes….I must add here that the best book to learn SAP Treasury in my opinion is ‘SAP Treasury and Risk Management’ from SAP Press by ‘Jarre, Lovenich, Martin, Muller’. The book more importantly explains the ‘Why’, which in my opinion is what a lot of people ignore and instead try to learn and master only the ‘How’, which I think is fine when you consider that ‘In the land of the blind, the one-eyed man is king’. (Note: In some of the notes below, I have used phrases / sentences from the above mentioned book)


Variation Margin

Because futures contracts are highly leveraged, margin levels are calculated daily, to protect the financial integrity of the clearinghouse. At the end of each trading day, the clearinghouse marks to market each open futures account with the last trading price, called the settlement price. In other words, the new futures price is used in calculating whether there is sufficient margin in the account to cover the new settlement price. If, after marking to market, the account’s margin has dropped below the maintenance level, then a margin call will be issued, and must be deposited before the next opening of trading. This is called variation margin.

Update Types and Sample Accounts

futures-update-types-and-accounts

Click the image for a larger picture

Point to Note

Create all close transactions and fix it using TBB1 before running the ‘post variation margin’ transaction with post ‘close margin’ enabled. Then only, the close margins will be picked up in this transaction

Data for Example

– Company Code Currency – INR
– Position Currency – USD
– Purchase price – 105, No:of Units = 1000, Exchange Rate = 46.69
– 1st Valuation key date Price – 107.50 , Key date Exchange rate = 46.00
– Valuation = (107.50 – 105) * 1,000 = 2,500 USD PC = X 46 = 115,000 INR
– Valuation Breakup
Security Valuation = (107.50 – 105) * 1,000 = 2,500 USD PC = X 46.69 = 116,725 INR LC Gain
– Foreign currency valuation = 2,500 USD difference X (46 – 46.69) = 1,725 INR Forex Loss
– The above is the valuation of the future to bring into books the Futures
– The valuation will post the gain/loss to P&L and the offsetting posting to the Asset / Liability position account in BS

Postings

In the same valuation step, the ‘variation margin – clearing account’ is valuated for foreign currency

We shall see the variation margin account

image

The daily variation margins are debited (if gains) and credited (if losses) to the variation margin account and the offsetting posting is done to the clearing account (Docs 100000454 to 100000456)

– The variation margin account is the counterpart of the margin account with the counterparty and is cleared by payment from/to the counterparty

– In our example, one such receipt of cash from the counterparty is reflected in document 100000457 in the variation margin account

– During, valuation, the margin clearing account is valuated for exchange difference. We can see that the closing USD is 2,000 and the local currency amount is 95,500, which gives an average exchange rate of 47.75. This is because, the daily postings of the variation margin will be done at those daily exchange rates

– But, when you valuate for exchange difference, the clearing account the balance based on the exchange rate on the key date should be 2,000 USD X 46 = 92,000 INR

– Hence, the valuation program will post a Foreign currency exchange loss of 3,500 INR in the local currency

We shall look at the account position after posting the valuations

image

– Document 100000458 is the valuation document

– Update type V180 posts the security valuation difference at the original exchange rate

– Update type V187 posts the foreign currency difference of 1,725 on the security valuation which we have calculated above

– Update type V210 posts the foreign currency exchange difference on the margin clearing account. We can see that now the margin clearing account has 2000USD @ 46 = 92,000

– The futures asset position has USD 2,500 @ 46 = 115,000

– Normally, the Margin clearing account and the Futures Asset/Liability position should offset each other. This is more so, as the exchange difference in the margin clearing account caused by postings at daily rates as compared to the closing rate posting in the futures asset/liability position has been adjusted by the posting through update type V210

– However, in our example we still see a difference on 500 USD (2,500 – 2000) between these accounts. This is because we have in our example used a valuation rate of 107.50 but a different rate for the variation margin posting on the key date of 107.00

We shall look at the account position after closing the open position

image

image

We have posted various daily variation margins and further key date valuation. After that we have closed the open position at the rate of 103 and the exchange rate on closure was 47.60

– This would result in a realized loss on the security of (103 – 105 original cost) X the current exchange rate of 47.60, which gives us a realized loss of 2,000 USD in PC and 95,200 INR in LC. This is done through the derived business transaction DBT_B020 – document 100000467

– This 2,000 USD clears the margin clearing account in Position currency (PC), however the clearing account in Local currency (LC) is not cleared with the 95,200. This is because of the postings in LC of the variation margins at different exchange rates. This difference in LC of 12,710 INR is cleared by the same derived business transaction using update type DBT_B022 (same document 100000467)

– The offsetting postings go to the respective accounts in the P&L


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2 Responses to Futures–Valuation of a Position in a Foreign Currency

  1. Lena says:

    Hi Gopa,

    I am interested in getting the SAP Press book “SAP Treasury and Risk Management’ as I think it will be useful to learn SAP Treasury. Do you know if I can find it in a library or borrow it? I live in Bangalore. Or is buying it the only option?

    Thanks,
    Lena

  2. victor Nkomo says:

    You can get an online version, if you dont want to order the hard copy

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