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Exposure-Based Cash-Flow-at-Risk: An Alternative to VaR for Industrial Companies

Andrén, Niclas LU ; Jankensgård, Håkan LU and Oxelheim, Lars LU (2005) In Journal of Applied Corporate Finance 17(3). p.76-86
Abstract (Swedish)
Abstract in Undetermined

Cash-Flow-at-Risk (CFaR) is the cash flow equivalent of Value-at-Risk (VaR), a measure widely used as the basis for risk management in financial institutions. Whereas VaR-based systems specify the maximum amount of total value a firm is expected to lose under most foreseeable conditions (for example, with a 99% confidence level), CFaR-based systems determine the maximum shortfall of cash the firm is willing to tolerate. CFaR is gaining in popularity among industrial companies for much the same reasons VaR has succeeded with financial firms: it sums up all the company's risk exposures in a single number that can be used to guide corporate risk management decisions.



The authors... (More)
Abstract in Undetermined

Cash-Flow-at-Risk (CFaR) is the cash flow equivalent of Value-at-Risk (VaR), a measure widely used as the basis for risk management in financial institutions. Whereas VaR-based systems specify the maximum amount of total value a firm is expected to lose under most foreseeable conditions (for example, with a 99% confidence level), CFaR-based systems determine the maximum shortfall of cash the firm is willing to tolerate. CFaR is gaining in popularity among industrial companies for much the same reasons VaR has succeeded with financial firms: it sums up all the company's risk exposures in a single number that can be used to guide corporate risk management decisions.



The authors describe a six-step process for calculating a measure they call “exposure-based CFaR” and then demonstrate its application to Norsk Hydro, the Norwegian industrial conglomerate. Exposure-based CFaR involves the estimation of a set of exposure coefficients that provide information about how various macroeconomic and market variables are expected to affect the company's cash flow, while also accounting for interdependencies among such effects. The resulting model enables management to estimate the variability in corporate cash flow as a function of various risks, and to predict how a hedging contract or a change in financial structure will alter the company's risk profile. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
cash flow at risk, macroeconomic risk, risk exposure, market risk
in
Journal of Applied Corporate Finance
volume
17
issue
3
pages
76 - 86
publisher
John Wiley & Sons
ISSN
1745-6622
DOI
10.1111/j.1745-6622.2005.00046.x
language
English
LU publication?
yes
id
9af2b688-cf27-4b6c-9005-4943c80a51fe (old id 1770086)
date added to LUP
2011-01-31 13:02:06
date last changed
2016-04-16 04:38:27
@article{9af2b688-cf27-4b6c-9005-4943c80a51fe,
  abstract     = {<b>Abstract in Undetermined</b><br/><br>
Cash-Flow-at-Risk (CFaR) is the cash flow equivalent of Value-at-Risk (VaR), a measure widely used as the basis for risk management in financial institutions. Whereas VaR-based systems specify the maximum amount of total value a firm is expected to lose under most foreseeable conditions (for example, with a 99% confidence level), CFaR-based systems determine the maximum shortfall of cash the firm is willing to tolerate. CFaR is gaining in popularity among industrial companies for much the same reasons VaR has succeeded with financial firms: it sums up all the company's risk exposures in a single number that can be used to guide corporate risk management decisions.<br/><br>
<br/><br>
The authors describe a six-step process for calculating a measure they call “exposure-based CFaR” and then demonstrate its application to Norsk Hydro, the Norwegian industrial conglomerate. Exposure-based CFaR involves the estimation of a set of exposure coefficients that provide information about how various macroeconomic and market variables are expected to affect the company's cash flow, while also accounting for interdependencies among such effects. The resulting model enables management to estimate the variability in corporate cash flow as a function of various risks, and to predict how a hedging contract or a change in financial structure will alter the company's risk profile.},
  author       = {Andrén, Niclas and Jankensgård, Håkan and Oxelheim, Lars},
  issn         = {1745-6622},
  keyword      = {cash flow at risk,macroeconomic risk,risk exposure,market risk},
  language     = {eng},
  number       = {3},
  pages        = {76--86},
  publisher    = {John Wiley & Sons},
  series       = {Journal of Applied Corporate Finance},
  title        = {Exposure-Based Cash-Flow-at-Risk: An Alternative to VaR for Industrial Companies},
  url          = {http://dx.doi.org/10.1111/j.1745-6622.2005.00046.x},
  volume       = {17},
  year         = {2005},
}