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Cash-Flow-at-Risk and Debt Capacity

Jankensgård, Håkan LU (2008)
Abstract
Cash Flow-at-Risk (CFaR) is a risk measure that conveys information on the shortfall in cash flow, associated with a certain probability, a firm could experience over a certain time period. However, to provide information on outcomes that are identified as costly by the risk management literature, in particular underinvestment due to financing constraints, a risk measure needs to make explicit reference to the firm’s presumed access to external sources of funding. What is called for is thus a framework in which cash flow-based measures of risk are conditional on the firm’s debt capacity. The group of risk measures presented in this paper incorporates this information. They render hedgeable magnitudes that can inform risk management... (More)
Cash Flow-at-Risk (CFaR) is a risk measure that conveys information on the shortfall in cash flow, associated with a certain probability, a firm could experience over a certain time period. However, to provide information on outcomes that are identified as costly by the risk management literature, in particular underinvestment due to financing constraints, a risk measure needs to make explicit reference to the firm’s presumed access to external sources of funding. What is called for is thus a framework in which cash flow-based measures of risk are conditional on the firm’s debt capacity. The group of risk measures presented in this paper incorporates this information. They render hedgeable magnitudes that can inform risk management strategies by indicating if a hedge is likely to mitigate costly consequences of volatility by acting as a substitute for equity capital. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working Paper
publication status
unpublished
subject
keywords
debt capacity, Risk, liquidity
issue
2
publisher
Lund Institute of Economic Research
ISSN
1103-3010
language
English
LU publication?
yes
id
3375d4c9-f344-4e3c-9107-eefead5d6943 (old id 1388010)
date added to LUP
2009-04-20 12:27:27
date last changed
2016-04-15 23:55:00
@misc{3375d4c9-f344-4e3c-9107-eefead5d6943,
  abstract     = {Cash Flow-at-Risk (CFaR) is a risk measure that conveys information on the shortfall in cash flow, associated with a certain probability, a firm could experience over a certain time period. However, to provide information on outcomes that are identified as costly by the risk management literature, in particular underinvestment due to financing constraints, a risk measure needs to make explicit reference to the firm’s presumed access to external sources of funding. What is called for is thus a framework in which cash flow-based measures of risk are conditional on the firm’s debt capacity. The group of risk measures presented in this paper incorporates this information. They render hedgeable magnitudes that can inform risk management strategies by indicating if a hedge is likely to mitigate costly consequences of volatility by acting as a substitute for equity capital.},
  author       = {Jankensgård, Håkan},
  issn         = {1103-3010},
  keyword      = {debt capacity,Risk,liquidity},
  language     = {eng},
  note         = {Working Paper},
  number       = {2},
  publisher    = {Lund Institute of Economic Research},
  title        = {Cash-Flow-at-Risk and Debt Capacity},
  year         = {2008},
}