Keeping EAR simple

Brett Humphreys discusses how trading groups can be captured within earnings-at-risk and cashflow-at-risk models. He suggests taking a top-down approach instead of a bottom-up approach based on actual positions

Over the past few years, sophisticated risk management departments have tried to implement enterprise-wide earnings-at-risk (EAR) or cashflow-at-risk (Cfar) models. These models are designed to measure the probability distribution of a company’s potential future cashflows. With this information in hand, management can examine a firm’s business lines as a portfolio and account for the diversification or offset that may exist between divisions. These models are useful for evaluating hedging