Treasury Management Internation Logo
Risk Management
Published  9 MIN READ

Building an In-house Solution to Cash-Flow-at-Risk

Building an In-house Solution to Cash-Flow-at-Risk

By Vincent Delort, Risk and Reporting Manager, JTI

While some companies will spend tens of thousands of dollars on a vendor solution to compute Cash-Flow-at-Risk, JTI (Japan Tobacco International) has implemented a low-cost, in-house solution using Excel. Vincent Delort, Risk and Reporting Manager at the company, shares the inside track on the project – including the precise Excel formulae used.

Foreign exchange (FX) risk is rather like the proverbial banana skin. You know it’s there and that if, or when, you fall on it, there will be painful consequences. But with FX, you’re not in a position to pick the banana skin up and remove it entirely; instead, you must look for ways to reduce the impact in case you fall on it. This means working out what injuries you might sustain and determining the best protective clothing to wear to minimise any damage.

My role at JTI centres around this concept, with the aim of reducing the risk that the company’s financial results are impacted by adverse currency movements. A good way of measuring this risk is using a metric called Cash-Flow-at-Risk (CFaR). This is a measure of the potential maximum loss in the value of expected cash flows resulting from an adverse market move, within a given confidence level for a given time horizon (see box 2 for more detail on inputs). The beauty of CFaR is that it results in just one number, which is relatively easy to understand and explain.

Box 1:  VaR vs CFaR: at a glance

The Value-at-Risk (VaR) metric is used by financial institutions to estimate the potential loss of market values on a portfolio.