Value at Risk & Cash Flow at Risk

Two questions, two models.

VaR tells you what your positions could lose in days. CFaR tells you how far your cash flows could miss budget this year. Most treasuries need both, and few should use one in place of the other.

Talk to a practitioner See it for your organisation

	VaR	CFaR
Measures	Change in market value of positions	Shortfall in cash flows against budget
Horizon	1 to 10 days	Quarters to years
Driven by	Market moves on what you hold today	Market moves on what you will receive and pay
Informs	Limits, capital and trading decisions	Hedge ratios, budgets, covenants and dividends

Who it is for

The same measures, a different balance sheet

CorporateFinancial institutionsFintech

Side by side

Separate measures for separate decisions

We build each one for the question it answers, then tie them together so the board sees one picture of risk.

VaRValue at Risk

“How much could the value of our positions fall over the next few days?”

For banks, trading desks, investment portfolios, treasury dealing books

Illustrative distribution of 10-day value changes. VaR marks the line; expected shortfall averages the tail beyond it.

Parametric, historical and Monte Carlo VaR
Expected shortfall for what happens beyond the line
Daily P&L attribution and backtesting
FRTB-aligned methodology for regulated entities

CFaRCash Flow at Risk

“How far could our operating cash flow miss budget this year?”

For corporate treasurers, cfos, boards and lenders

Illustrative cash flow fan against budget. CFaR is the shortfall at the chosen confidence level.

Monte Carlo across FX, rates and commodities together
Correlations and forecast uncertainty modelled, not assumed
Hedge ratios set from the CFaR the board will tolerate
Covenant and rating headroom under stress

Where we apply it

Risk by risk

The same framework across every exposure the business carries, so the totals add up and the offsets are visible.

FX: Transactional and translation exposure, forecast confidence by horizon, and the hedge ratio that matches.
Interest rates: Fixed/floating mix, refinancing risk and EaR on the debt book; IRRBB (EVE and NII) for banks.
Commodities: Energy, metals and agricultural inputs, including basis risk between the hedge and the physical price.
Credit & counterparty: Exposure profiles, collateral and CVA, and concentration across bank counterparties.
Lease residual values: The market value of leased assets at term end: a CFaR problem hiding in the balance sheet.Read the case study ↓
Hedge optimisation: The efficient frontier between CFaR and earnings volatility, so cost and risk are traded off explicitly.

Case study · Illustrative

Residual value risk in a lease book

A lessor prices every lease on an assumed residual value: what the asset will be worth when it comes back. Across thousands of vehicles or machines, that assumption is one of the largest risks on the balance sheet, and it is rarely measured like one.

Illustrative: market value of a leased asset as a share of cost over a 60-month term, with the 50% and 90% ranges and a used-asset price shock from month 30.

The situation: An equipment and vehicle lessor sets residual values at inception. Used-asset prices move with the cycle, technology and regulation, so the realised value at term end can land well below the price that was assumed.
The approach: Simulate used-asset prices by asset class, age and mileage; aggregate across the book by maturity to get RV at risk; stress test cycle downturns and technology shifts; compare guarantees, remarketing agreements and RV insurance.
What it changes: Residual values set with a known confidence, not a point guess. Pricing that carries the cost of the risk taken, and earlier warning on the maturities most exposed. Under IFRS 16 a reduction in a finance lease residual hits profit or loss at once, so the model is also a reporting control.

Go deeper

A CFaR approach for CFOs

Our paper on commodity, FX and interest rate volatility sets out the full pathway: quantification, hedging, accounting, governance and communication.

Brochure

Commodity, FX and Interest Rate Volatility — A CFaR Approach

A CFO framework for understanding hedging and implementing Cash Flow at Risk (CFaR) across commodity, FX and interest rate exposures — quantification, hedging, accounting and governance in one repeatable cadence.

Read the CFaR paper

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