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The Credit Risk Management-Financial Instrument Pricing ES bundle offers a streamlined, two-fold process for assessing the credit worthiness of various interest-sensitive instruments. It quickly calculates levels of risk for these options, such as swaptions.

And this ES bundle also calculates the risk exposures of aggregated trades with another party, such as a bank, so that possible defaults can be flagged. The result is that a large number of complex financial instruments are valued consistently and fairly over time.
The Credit Risk Management - Financial Instrument Pricing ES bundle leverages enterprise SOA by providing enterprise service-based communication between the SAP Bank Analyzer and third-party financial instrument pricing applications.

Audience

Wide-ranging types of financial firms that want to quickly and consistently assess their risk exposure to credit-sensitive financial instruments will find this ES bundle especially helpful. These firms can include commercial or investment banks, security firms or broker/dealers. The treasurers of big corporations or insurance companies can also benefit from using this bundle because they can determine the fair price of complex, interest-sensitive instruments, such as bond options. The credit worthiness of large amounts of trades with other parties can also be quickly assessed.

Credit Risk Management - Financial Instrument Pricing (click to enlarge)

For details on Service Operations, Business Objects and Process Components, please check the ES Workplace.


How To Use This ES Bundle

Previously, the pricing process for complex, interest-rate sensitive instruments was handled separately. Data was fed into separate pricing models with varying parameters. That data could vary widely by calendar day, interest rate, or even instrument and party. Thus, the valuation process was inevitably more time-consuming and inconsistent, producing widely varying results.

The SAP Credit Risk Management-Financial Instrument Pricing ES bundle offers a means of assessing risk exposure for complex, interest-rate sensitive instruments across varying time spans and for different parties. In a two-step process, the credit risk of an instrument is identified and valued by inputting set criteria, namely working day calendar and reference rate. Once valued, a pricing model gauges the instrument's fair price that reflects its risk level. Thus, traders as well as credit managers in the back office can see the same price because they are using the same, consistent pricing engine. Based on that data, credit managers can also clearly determine if an instrument's-or party's-high-risk level calls for more collateral on hand, for example.

The following use case for the Financial Accounting - Financial Instrument Pricing ES bundle illustrates the message choreography between SAP Bank Analyzer and the third-party pricing engine. This wiki is also a space for you to share knowledge and collaborate with others who are implementing the Credit Risk Management - Financial Instrument Pricing ES bundle.

Use Case 1: Using an External Pricing Engine

A credit manager selects the types of financial instruments that will be priced using the external pricing engine. When it is time to price the selected financial instruments, perhaps in a batch job at night, SAP Bank Analyzer invokes two enterprise services that provide input to the external pricing application: Request Working Day Calendar Creation and Request Reference Interest Rate Creation, both of which use the Interest Rate Option Cash Flow business object.
Request Reference Interest Rate Creation specifies the interest rate and the type of calculation to perform while Request Working Day Calendar Creation simply provides calendar-related details.

The order in which these two services are invoked is unimportant; it is just important that both are called prior to calling Request Pricing Model Calibration, which requests that the external pricing engine generate a price. This enterprise service uses the Interest Rate Option Pricing Model business object.

To retrieve the price, SAP Bank Analyzer invokes the Query Price Calct Pricing Result by Elements enterprise service operation, which uses the Interest Rate Option Price Calculator business object; the external pricing engine then returns the calculated price.

Future Directions

Future directions for this ES bundle will be market-driven.

System Requirements

Related ES Bundles

Credit Risk - Modeling

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