Cash flow at risk (CFaR) and earnings at risk (EaR) have much to offer as techniques to test current assumptions and validate exposure forecasting to reflect a company’s FX risks.
CFaR measures the extent to which future cash flows may fall short of expectations as a consequence of changes in market variables, while EaR assesses the amount that net income may change due to a change in FX rates over a specified period.
From a reporting perspective, CFaR and EaR allow treasurers to move to an FX risk discussion with the CFO and board and away from a hedging policy-driven approach.
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