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

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  • Niclas Andrén
  • Håkan Jankensgård
  • Lars Oxelheim

Abstract

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. 2005 Morgan Stanley.

Suggested Citation

  • Niclas Andrén & Håkan Jankensgård & Lars Oxelheim, 2005. "Exposure-Based Cash-Flow-at-Risk: An Alternative to VaR for Industrial Companies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(3), pages 76-86.
  • Handle: RePEc:bla:jacrfn:v:17:y:2005:i:3:p:76-86
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    Cited by:

    1. Baule, Rainer, 2014. "Allocation of risk capital on an internal market," European Journal of Operational Research, Elsevier, vol. 234(1), pages 186-196.
    2. Meilan Yan & Maximilian J. B. Hall & Paul Turner, 2014. "Estimating Liquidity Risk Using The Exposure‐Based Cash‐Flow‐At‐Risk Approach: An Application To The Uk Banking Sector," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 19(3), pages 225-238, July.

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