Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 635: Exposure-based Cash-Flow-at-Risk under Macroeconomic Uncertainty

Niclas Andrén , Håkan Jankensgård and Lars Oxelheim ()
Additional contact information
Niclas Andrén: Department of Business Administration, Postal: Lund University, P.O. Box 7080, SE-220 07 Lund, Sweden
Håkan Jankensgård: The Research Institute of Industrial Economics, Postal: Lund University, P.O. Box 7080, SE-220 07 Lund, Sweden
Lars Oxelheim: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: In this paper we derive an exposure-based measure of Cash-Flow-at-Risk (CFaR). Existing approaches to calculating CFaR either only focus on cash flow conditional on market changes or neglect market-risk exposures entirely. We argue here that an essential first step in a risk-management program is to quantify cash-flow exposure to macroeconomic and market risk. This is the information relevant for corporate hedging. However, it is the total level of cash flow in relation to the firm’s capital needs that is the information relevant for decision-making. The firm’s overall CFaR is then calculated based on an assessment of corporate risk exposure.

Keywords: Cash-Flow-at Risk; Corporate Hedging; Downside Risk; Risk Exposure; MUST-analysis; Value-at-Risk

JEL-codes: F23; G30; G32; M21

25 pages, March 14, 2005

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