02 · VaR & CFaR
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.
Side by side
We build each one for the question it answers, then tie them together so the board sees one picture of 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.
“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.
Where we apply it
Transactional and translation exposure, forecast confidence by horizon, and the hedge ratio that matches.
Fixed/floating mix, refinancing risk and EaR on the debt book; IRRBB (EVE and NII) for banks.
Energy, metals and agricultural inputs, including basis risk between the hedge and the physical price.
Exposure profiles, collateral and CVA, and concentration across bank counterparties.
The market value of leased assets at term end: a CFaR problem hiding in the balance sheet.
Read the case study ↓The efficient frontier between CFaR and earnings volatility, so cost and risk are traded off explicitly.
Case study · Illustrative
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.
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.
Accounting angle. Under IFRS 16, lessors review estimated unguaranteed residual values regularly. For finance leases, a reduction is recognised immediately in profit or loss, so a residual value model is also a reporting control.
Go deeper
Our paper on commodity, FX and interest rate volatility sets out the full pathway: quantification, hedging, accounting, governance and communication.
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.
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