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  • CAR&VAR

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    Rahul Maanchala
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    The document discusses Cash Flow at Risk (CaR) and Value at Risk (VaR) as risk measurement tools for firms. It states that CaR measures the risk that a firm's cash flow will fall below a critical value, making it appropriate for firms dependent on annual cash flow for growth opportunities. VaR measures the risk of loss on a portfolio, and is the appropriate measure of risk for a firm's total value, as value depends on all future cash flows. Most firms require consideration of both CaR and VaR given partial dependence on annual cash flows and access to capital markets.

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    The document discusses Cash Flow at Risk (CaR) and Value at Risk (VaR) as risk measurement tools for firms. It states that CaR measures the risk that a firm's cash flow will fall below a critical value, making it appropriate for firms dependent on annual cash flow for growth opportunities. VaR measures the risk of loss on a portfolio, and is the appropriate measure of risk for a firm's total value, as value depends on all future cash flows. Most firms require consideration of both CaR and VaR given partial dependence on annual cash flows and access to capital markets.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    12 views7 pages

    CAR&VAR

    Uploaded by

    Rahul Maanchala
    The document discusses Cash Flow at Risk (CaR) and Value at Risk (VaR) as risk measurement tools for firms. It states that CaR measures the risk that a firm's cash flow will fall below a critical value, making it appropriate for firms dependent on annual cash flow for growth opportunities. VaR measures the risk of loss on a portfolio, and is the appropriate measure of risk for a firm's total value, as value depends on all future cash flows. Most firms require consideration of both CaR and VaR given partial dependence on annual cash flows and access to capital markets.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
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    CASH FLOW AT RISK(CAR)

    NAME:M.S.REVANYA HT.NO:160710672031 DATE:24-02-2012

    CASH FLOW AT RISK(CAR) The firm evaluates the cash flow shortfall corresponding to the probability level If the cash flow shortfall at the probability level is too great, the firm has to take actions to reduce the risk of its cash flow This approach is equivalent to the VaR approach,except that is applied to cash flow The cash flow shortfall corresponding to the probability level choosen by the firm is thus called Cash flow at risk or CaR at that probability level

    VALUE AT RISK(VAR) In Financial mathematics and Financial risk management Value at risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets Var has four main uses in finance they are Risk management Financial control Financial reporting and Computing regulatory capital VaR is used in two types One is used primarily in Risk management

    Other is used primarily in Risk measurement VarRis sometimes used in non-financial applications as well Common parameters for VaR are 1% and 5% VaR is a system not a number For risk measurement a number is needed not a system When VaR is used for Financial control or Financial reporting it should incorporate elements of both VaR is superior for making short-term and tactical decisions

    VaR 0r CaR
    Should a firm measure and control firm value at risk cash flow at risk or both? A firm that depends soley on its cash flow to take advantage of its growth oppurtunities has to manage the risk of cash flow for the coming year Otherwise the firm can incur costs of financial distress and may have to cut investment it its cash flow is unexpectedly low CaR is a measure of the risk that cash flow will fall below some critical value Hence it is an appropriate risk measure for a such a firm

    A firms value is the present value of its cash flows This means that firm value risk depends on the risk of all future cash flows The appropriate measure of firm value risk is firm VaR Most firms are somewhere between free access to capital market and dependent only on the cash flow of this year to finance next years investment Not surprisingly investment banks pay a lot of attention to VaR Many non financial firms estimate a VaR for the derivative products they hold

    THANK YOU

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