{"id":46024,"date":"2023-02-16T10:17:58","date_gmt":"2023-02-16T15:17:58","guid":{"rendered":"https:\/\/www.bloomberg.com\/professional\/insights\/treasury\/benefits-cfar-ear-corporate-risk-management\/"},"modified":"2024-04-05T16:40:59","modified_gmt":"2024-04-05T20:40:59","slug":"benefits-cfar-ear-corporate-risk-management","status":"publish","type":[3762],"link":"https:\/\/www.bloomberg.com\/professional\/insights\/treasury\/benefits-cfar-ear-corporate-risk-management\/","title":{"rendered":"The benefits of CFaR and EaR for corporate risk management"},"content":{"rendered":"<div  class=\"bbg-row-container\">\n    <style>section[data-anchor=row-6a078f1ff3571]::before {\n\t\t\t\tbackground-color: #eeeeee;\n\t\t\t}<\/style>\n    <section class=\"bbg-row bg--custom-color  bg--eeeeee text--black bbg-row--full-bg-bleed\" data-anchor='row-6a078f1ff3571'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8 bbg-column--valign-bottom\"\n    style=\"\"\n    >\n    <p>    <ul class=\"bbg-categories_list\">\n                    <li>\n                <a href=\"https:\/\/www.bloomberg.com\/professional\/insights\/category\/risk\/\" rel=\"category tag\">\n                    Risk\n                <\/a>\n            <\/li>\n                    <li>\n                <a href=\"https:\/\/www.bloomberg.com\/professional\/insights\/category\/treasury\/\" rel=\"category tag\">\n                    Treasury\n                <\/a>\n            <\/li>\n            <\/ul>\n<div\n    class=\"bbg-spacer\"\n        style=\"height: 24px !important\"\n    >\n<\/div>    <h1 class=\"bbg-metadata bbg-metadata--title\">The benefits of CFaR and EaR for corporate risk management<\/h1>\n<\/p>\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <section class=\"bbg-row  text--black row-padding--top-compact row-padding--bottom-none bbg-row--full-bg-bleed\" data-anchor='row-6a078f2004cc5'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8\"\n    style=\"\"\n    >\n    <p><div\n    class=\"bbg-spacer\"\n        style=\"height: 40px !important\"\n    >\n<\/div><div\n\tclass=\"bb-wysiwyg byline\"\n\t\t>\n\t<p><strong>Bloomberg Professional Services<\/strong><\/p>\n\n<\/div>\n    <p class=\"bbg-metadata bbg-metadata--date\">February 16, 2023<\/p>\n<\/p>\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <section class=\"bbg-row  text--black row-padding--top-none bbg-row--full-bg-bleed\" data-anchor='row-6a078f2006c94'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8\"\n    style=\"\"\n    >\n    <p><div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p>Exposure is traditionally the driving force of risk management, but it has its blind spots. With complications like associated risk, simple hedging percentages often prove \u00a0to be insufficient.<\/p>\n<p>The key for companies is to quantify their diversification between different entities and exposures, particularly taking into account the impact of FX rate volatility on liquidity risk and earnings risk.<\/p>\n<p><strong>New emerging best practices<\/strong><\/p>\n<p>Most treasury departments receive monthly cash flow forecasts from their business units and are applying a fixed minimum and maximum hedging percentage for the current financial year, with possibly a lower one for the next financial year.<\/p>\n<p>The treasury department may then back-to-back these trades with the business units and market or net and hedge with some level of guidance provided by the board. At this point, most treasury departments are done and report solely on this basis. Risk meetings become a discussion around whether the hedge percentage is adequate and appropriate. The analysis of the impact on earnings or liquidity is rarely done by treasury departments and, therefore, is not tied back to reporting to the board the success or not of the hedging program.<\/p>\n\n<\/div>\n<div class=\"bbg-interstitial\" aria-label=\"interstitial\" tabindex=\"0\">\n\t<style>\n\t\t.bbg-interstitial #card_1.bbg-card_hasCta{\n\t\t\tbackground:rgba(0,0,0,0);\n\t\t\tpadding: 104px;\n\t\t\t\n\t\t\t\n\t\t}\n\t\t.bbg-interstitial #card_1.bbg-card_hasCta .bbg-card__content, .bbg-interstitial #card_1.bbg-card_hasCta .bbg-card__content p{\n\t\t\tcolor:inherit;\n\t\t}\n\t\t@media (max-width: 768px) {\n\t\t\t.bbg-interstitial #card_1.bbg-card_hasCta{\n\t\t\t\tpadding: 80px 32px;\n\t\t\t}\n\t\t}\n\t\t@media (max-width: 480px) {\n\t\t\t.bbg-interstitial #card_1.bbg-card_hasCta{\n\t\t\t\tpadding: 80px 18px;\n\t\t\t}\n\t\t}\n\t<\/style>\n\t<div class=\"wpb_content_element bbg-card  bbg-card-dark bbg-card_hasCta has_interstitial\" id=\"card_1\" data-card_type=\"no_image\">\n  \n  \n  <div class=\"bbg-card__innerwrapper\">\n    <div class=\"bbg-card__content\">\n      \n      \n                      <h3 class=\"bbg-card__title\">Corporate treasury insights delivered monthly to your inbox.<\/h3>\n      \n              <div class=\"bbg-card__wysiwyg bb-wysiwyg\"><p>Sign up for the newsletter<\/p>\n<\/div>\n          <\/div>\n\n          \n<div\n  id=\"cta_7917627273867331714\"\n  class=\"wpb_content_element bbg-cta icon icon-arrow\">\n  <style>\n    \n    \n    \n  <\/style>\n  <div\n    class=\"bbg-cta-link link-holder\"\n    data-links-type=\"cta-links\">\n    <p class=\"bbg-cta-p right\">\n      <a\n        class=\"bbg-cta-link link interstitial_cta\"\n        href=\"https:\/\/www.bloomberg.com\/professional\/insights\/newsletter\/\"\n        target=\"_blank\"\n        rel=\"\"\n        data-section-name=\"\"\n                role=\"button\"\n        aria-label=\"Learn more\"\n        >\n                <\/a>\n    <\/p>\n  <\/div>\n<\/div>\n\n      <\/div>\n\n  <\/div>\n\n<\/div>\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p>This is generally regarded as best practice, but it is one-dimensional given that no analysis is performed and no metrics are brought back to the board and CFO. More targeted risk methodologies have emerged that are better aligned with the requirements of corporate treasurers.<\/p>\n<p>Two of the most important concepts being discussed are cash flow at risk (CFaR) and earnings at risk (EaR). CFaR is a model that measures possible shortfalls in cash flow due to FX rate fluctuations that could have a knock-on effect on a company\u2019s profit and loss (P&amp;L) and liquidity, while EaR is the value of earnings at risk due to FX rate fluctuations.<\/p>\n<p><strong>The link between CFaR and EaR<\/strong><\/p>\n<p>For corporates, the earnings statement and cash flow statement are key reports for the board and shareholders. The impact that market risk can have on these financial statements will, in turn, impact shareholder value, thus corporate senior management is particularly concerned with these risks. This is why both CFaR and EaR are important components of corporate risk management.<\/p>\n<p>On the surface, the two methodologies may appear close to being the same. However, the relationship between liquidity and earnings is driven by a variety of factors, including the corporate intercompany structure, the locations the company is participating in and the policy around cash repatriations.<\/p>\n<p>An assumption to consider when looking at how liquidity and earnings impact each other: The idea that treasurers can keep hedging cash flow exposures and, at the same time, look after the earnings at risk is not always true. Corporations are so focused on applying and following the advocated best practice that they often do not analyze the impact the hedging program is having on group earnings \u2014 even though this is a key metric of the CFO and the board.<\/p>\n<p>There is a tradeoff where, at some point, the increase in cash flow hedges can increase the earnings risk, which can be undesirable. Understanding this relationship can shed light on what companies need to hedge and what they feel comfortable with in earnings versus cash flow risk, as well as how much cash flow risk hedges they want to layer or whether they want to start thinking about a way to protect earnings that is independent from liquidity.<\/p>\n<p>Any intercompany purchases or sales in foreign currency are going to have cash flow at risk for one or both entities. Any time a company has third-party purchases in a currency that is not a functional currency of the entity or group, it is both CFaR and EaR. Cash flows in the domestic currency of the entity, but not the functional currency of the company, will have EaR but not CFaR.<\/p>\n<p>The corporate treasury function is usually considered a support function within a company\u2019s organization. As senior management sets its goals, priorities and focus, the treasury department needs to have the ability to achieve those objectives. The CFO will have an earnings target and will measure progress in achieving that target. However, CFOs do not always look to the treasury to reduce the risk of achieving that target due to FX rate volatility, as the CFO relies on market standard best practice using a hedge percentage program that does not tie back to a worst-case earnings impact number for FX volatility.<\/p>\n\n<\/div>\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p><strong>Technology supporting methodology<\/strong><\/p>\n<p>Because CFaR and EaR are data-dependent, having the right technology in place is essential to surface information quickly and accurately.<\/p>\n\n<\/div>\n<div class=\"bbg-interstitial\" aria-label=\"interstitial\" tabindex=\"0\">\n\t<style>\n\t\t.bbg-interstitial #card_2.bbg-card_hasCta{\n\t\t\tbackground:rgba(0,0,0,0);\n\t\t\tpadding: 104px;\n\t\t\t\n\t\t\t\n\t\t}\n\t\t.bbg-interstitial #card_2.bbg-card_hasCta .bbg-card__content, .bbg-interstitial #card_2.bbg-card_hasCta .bbg-card__content p{\n\t\t\tcolor:inherit;\n\t\t}\n\t\t@media (max-width: 768px) {\n\t\t\t.bbg-interstitial #card_2.bbg-card_hasCta{\n\t\t\t\tpadding: 80px 32px;\n\t\t\t}\n\t\t}\n\t\t@media (max-width: 480px) {\n\t\t\t.bbg-interstitial #card_2.bbg-card_hasCta{\n\t\t\t\tpadding: 80px 18px;\n\t\t\t}\n\t\t}\n\t<\/style>\n\t<div class=\"wpb_content_element bbg-card  bbg-card-dark bbg-card_hasCta has_interstitial\" id=\"card_2\" data-card_type=\"no_image\">\n  \n  \n  <div class=\"bbg-card__innerwrapper\">\n    <div class=\"bbg-card__content\">\n      \n      \n                      <h3 class=\"bbg-card__title\">See how Constellation Brands put the CFaR and EaR concepts into action<\/h3>\n      \n              <div class=\"bbg-card__wysiwyg bb-wysiwyg\"><p>Access the case study<\/p>\n<\/div>\n          <\/div>\n\n          \n<div\n  id=\"cta_1512195876018562\"\n  class=\"wpb_content_element bbg-cta icon icon-arrow\">\n  <style>\n    \n    \n    \n  <\/style>\n  <div\n    class=\"bbg-cta-link link-holder\"\n    data-links-type=\"cta-links\">\n    <p class=\"bbg-cta-p right\">\n      <a\n        class=\"bbg-cta-link link interstitial_cta\"\n        href=\"https:\/\/data.bloomberglp.com\/professional\/sites\/10\/Constellation-Brands-Case-Study.pdf\"\n        target=\"_blank\"\n        rel=\"\"\n        data-section-name=\"\"\n                role=\"button\"\n        aria-label=\"Learn more\"\n        >\n                <\/a>\n    <\/p>\n  <\/div>\n<\/div>\n\n      <\/div>\n\n  <\/div>\n\n<\/div>\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p>It is about having reliable data in a flexible format \u2013 meaning such data can be used in tools that vary from the Bloomberg Terminal and optimization tools to PowerPoint presentations. Data should also be customizable, with the ability to craft sophisticated constraints for modeling.<\/p>\n<p>With the right technology and a hedging program that incorporates the tradeoff between CFaR and EaR, companies can determine where their risk exists and quantify its diversification. This enables companies to hit their defined level of risk year after year.<\/p>\n\n<\/div>\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <style>section[data-anchor=row-6a078f200c998]::before {\n\t\t\t\tbackground-color: #eeeeee;\n\t\t\t}<\/style>\n    <section class=\"bbg-row bg--custom-color  bg--eeeeee text--black bbg-row--full-bg-bleed\" data-anchor='row-6a078f200c998'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <div\n    class=\"bbg-column\"\n    style=\"\"\n    >\n    <div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<h2>Recommended for you<\/h2>\n\n<\/div>\n<div\n    class=\"bbg-spacer\"\n        style=\"height: 24px !important\"\n    >\n<\/div><script>\n    window.feed = window.feed || {};\n    window.feed['6a078f200f34b'] = 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Now, let us do that for you.<\/p>\n<\/div>\n          <\/div>\n\n          \n<div\n  id=\"cta_2739544520121521103\"\n  class=\"wpb_content_element bbg-cta icon icon-arrow\">\n  <style>\n    \n    \n    \n  <\/style>\n  <div\n    class=\"bbg-cta-link link-holder\"\n    data-links-type=\"cta-links\">\n    <p class=\"bbg-cta-p right\">\n      <a\n        class=\"bbg-cta-link link interstitial_cta\"\n        href=\"https:\/\/www.bloomberg.com\/professional\/request-demo\/\"\n        target=\"\"\n        rel=\"\"\n        data-section-name=\"\"\n                role=\"button\"\n        aria-label=\"Learn more\"\n        >\n                <\/a>\n    <\/p>\n  <\/div>\n<\/div>\n\n      <\/div>\n\n  <\/div>\n\n<\/div>\n\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The key for companies is to quantify their diversification between different entities and exposures, particularly taking into account the impact of FX rate volatility on liquidity risk and earnings risk.<\/p>\n","protected":false},"author":1610,"featured_media":30439,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"template-article.php","format":"standard","meta":{"_yoast_wpseo_primary_category":"","footnotes":""},"categories":[469,449],"tags":[451],"series":[],"class_list":["post-46024","post","type-post","status-publish","format-standard","hentry","category-risk","category-treasury","tag-corporations","type-article"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v19.11 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The benefits of CFaR and EaR for corporate risk management | Insights | Bloomberg Professional Services<\/title>\n<meta name=\"description\" content=\"The key for companies is to quantify their diversification between different entities and exposures, particularly taking into account the impact of FX rate volatility on liquidity risk and earnings risk.\" 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