Abstract
A strategically minded CFO will realize that strategic corporate risk management is about finding the right balance between risk prevention and proactive value generation. Efficient risk and performance management requires adequate assessment of risk and risk exposures on the one hand and performance on the other. Properly designed, a risk measure should provide information on to what extent the firm’s performance is at risk, what is causing that risk, the relative importance of non-value-adding and value-adding risk, and the possibilities to use risk management to reduce total risk. In this chapter, we present an approach – exposure-based cash-flow-at-risk – to calculating a firm’s downside risk conditional on the firm’s exposure to non-value-adding macroeconomic and market risk and to analyzing corporate performance adjusted for the impact of non-value-adding risk.
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Hydro’s 2003 annual report (p. 85) states, “Normally, Hydro’s operating income will increase when the US dollar appreciates against European currencies and decline when the value of the US dollar falls. To reduce the long-term effects of fluctuations in the US dollar exchange rates, Hydro has issued most of its debt in US dollars.” Hydro also estimates the impact on pre-tax income of a 1 NOK/USD increase to be NOK 875Mn.
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Andrén, N., Jankensgård, H., Oxelheim, L. (2011). Exposure-Based Cash-Flow-at-Risk for Value-Creating Risk Management Under Macroeconomic Uncertainty. In: Hommel, U., Fabich, M., Schellenberg, E., Firnkorn, L. (eds) The Strategic CFO. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-04349-9_6
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DOI: https://doi.org/10.1007/978-3-642-04349-9_6
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