Cash Flow at Risk Models:
Principles, Application and
a Case Study
Douglas Lecocq
Managing Director, Brand Finance
Australia
Introduction
• Cash Flow at Risk (CFaR)
– A generic label
– A specific implementation
• Market Risks
– Interest rates, foreign exchange rates and
commodity prices
• Key Performance Metric
– Cash Flow, EBITDA or EVA
Principles
• Market risks are taken together
• Risk identification and mapping
• Risk measurement
• Company specific risk vision
• Changing nature of risk and the external
environment
• Management of risks
Approach
• Market risk assessment
• Business modelling
• Analysis
• Stress tests
Case Study
• ABC Mining
• Melbourne based mining company
• Copper mine in Java
• Gold mine in WA
• Fully hedged US debt
• EBITDA Key performance metric
Case Study
• Market risk assessment
Commodity/Currency Mean Standard Distribution
Deviation
US Dollar (per AUD) 0.6000 0.0600 Normal
Rupiah (per AUD) 5,300 795 Normal
Gold (USD per Oz.) 325 20 Lognormal
Copper (USD per Tonne) 1,600 75 Lognormal
Co-variances US Dollar Rupiah Gold Copper
US Dollar 1.000 0.000 0.750 0.000
Rupiah 1.000 0.000 -0.500
Gold 1.000 0.000
Copper 1.000
Case Study
• Corporate model
Copper Mine & Smelter Gold Mine and Smelter
Location Java, Indonesia Western Australia
Production 1,000,000 Tonnes 1,500,000 Ounces
Operating Costs 10,000 Billion Rupiah $850 Million Australian
Additions to P&E None $750 Million Australian
Sales of P&E 8,500 Billion Rupiah None
Economic Assumptions
US Dollar 0.6000 per AUD
Rupiah 5,300 per AUD
Gold 325 USD per Oz.
Copper 1,600 USD per Tonne
Case Study
Forward Options
Budgeted EBITDA Underlying Program Program
(AUD Millions) Position
Cash flows from operating activities
Receipts from customers 3,479 3,479 3,479
Payments to suppliers and employees -2,887 -2,887 -2,887
Payments for other operating activities -200 -200 -200
Net cash inflow / (outflow) from operating activities 392 392 392
Net cash inflow / (outflow) from investing activities -854 -854 -854
Cash flows from financing activities
Proceeds from / repayments of borrowings 1,000 1,000 1,000
Dividends paid -100 -100 -100
Option premiums 0 -30 -200
Net cash inflow / (outflow) from financing activities 900 870 700
Budgeted EBITDA 438 408 238
Case Study
• CFaR Analysis
EBITDA Underlying Forward Options
(AUD Millions) Position Program Program
Budget 438 408 238
Mean 390 405 453
Median 425 408 403
Standard Deviation 680 157 489
CFaR at 5.0% -778 143 -248
Frequency
-1,213
-1,001
-789
• CFaR Analysis
-578
Case Study
-366
-154
58
269
EBITDA
481
Underlying Position
693
904
1,116
1,328
1,539
1,751
1,963
Frequency
25
75
125
• CFaR Analysis
175
Case Study
226
276
326
377
EBITDA
427
Forward Program
477
527
578
628
678
729
779
Frequency
-583
-436
-289
• CFaR Analysis
-142
Case Study
5
152
300
447
EBITDA
594
Option Program
741
888
1,035
1,183
1,330
1,477
1,624
Case Study
• Stress tests Scenario Description
(AUD Millions)
Underlying
Scenario
Forward
Program
Option
Program
EBITDA Scenario Scenario
EBITDA EBITDA
AUD = US $0.75 (AUD appreciates by US $0.15) and -658 87 -327
Gold = US $225 (Gold depreciates by US $100)
AUD = 3,800 Rupiah (AUD appreciates by 1,500 Rupiah) and -1,606 -23 -670
Copper = US $1,200 (Copper depreciates by US $400)
AUD = US $0.75 (AUD appreciates by US $0.15) and
Gold = US $225 (Gold depreciates by US $100) and
AUD = 3,800 Rupiah (AUD appreciates by 1,500 Rupiah) and
-2,569 -335 -1,243
Copper = US $1,200 (Copper depreciates by US $400)
AUD = US $0.45 (AUD depreciates by US $0.15) and 2,264 774 2,064
Gold = US $425 (Gold appreciates by US $100)
AUD = 6,800 Rupiah (AUD depreciates by 1,500 Rupiah) and 1,875 806 1,675
Copper = US $2,000 (Copper appreciates by US $400)
AUD = US $0.45 (AUD depreciates by US $0.15) and
Gold = US $425 (Gold appreciates by US $100) and
AUD = 6,800 Rupiah (AUD depreciates by 1,500 Rupiah) and
3,923 1,183 3,723
Copper = US $2,000 (Copper appreciates by US $400)
Case Study
• Conclusion
– Underlying Scenario
• Huge volatility – up and downside
– Forward Program
• Reduced volatility
• Up-side give away
– Option Program
• Reduced volatility
• Up-side retention
• High cots
Discussion Prompts
• Usefulness of approach
– High complexity
– Less dramatic results in on-going
management of risk
• Extensions of approach
– Non-market risks
– Brand Value at Risk
– Insurance valuation parameters as “Market
Risk Factors”
Cash Flow at Risk Models:
Principles, Application and
a Case Study
Douglas Lecocq
Managing Director, Brand Finance
Australia