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.  Sign up for free to read the full article Register Login with LinkedIn Already have an account? Login Download our Free Treasury App for mobile and tablet to read articles – no log in required. Download Version Download Version Related Articles Risk Management Don’t Leave the Door Open for Cyber Fraud We highlight the impact of ransom fraud in unplanned cash outflow, and provide steps to mitigate. Risk Management From ESG Data to Decisions and Disclosures Experts from FIS and PwC discuss the latest compliance issues and how their firm’s respective work helps firms model and assess their risk. Risk Management Exposure Meter Is volatility in commodity pricing simply accepted, or can treasury leverage its understanding of mitigation processes and financial tools to add value? Risk Management Risky Business Outlook on Corporate Credit Quality Following a year of economic growth concerns, sticky core inflation, increasing interest rates, and a rash of bank failures, treasurers have been acting as corporate risk... Risk Management How to Write a Robust Treasury Policy and Limit Unwanted Outcomes Treasury policy is the executive mandate to the treasurer, as custodian of financial risk. This in-depth yet accessible guide explains how to get it right. Risk Management Stronger Together Nicolas Trimbour BNP Paribas) and Laurent Sarrat (Sis ID) highlight the greatest cyber and fraud threats confronting organisations today, together with best practices to avoid being compromised. Risk Management Mission Intelligence Two industry experts offer an in-depth examination of AIs potential uses for risk management. Risk Management Don’t Forget to Breathe! Natasha Condon and Martijn Stoker explain how corporate treasury teams can manage ongoing uncertainty in 2023. Home TMI App Awards Innovation Lab TMI Webinar Club Events Directory of Treasury Services eLearning Module Categories Banking Cash & Liquidity Management Crypto & DeFi CSR & ESG Country & Regional Focus My Life in Treasury Regulation & Standards Risk Management Treasury Strategy & Transformation Tax, Accounting & Legal Trade Finance Treasury Technology Quick Links Privacy Policy Terms and Conditions Contact Us By using our website, you agree to our cookie policy Close Cookie Notice