Earnings @ Risk Modeling

Asia-Pacific Risk Management provides advice to New Zealand, Australian and Asian clients on their financial market risks through the use of quantitative risk modeling, in particular, Earnings-at-Risk Modeling.

The purpose of Earnings at Risk modeling is to test company’s existing policy control limits against alternative policies in order to prove up an optimum multi-weather policy.

Asia-Pacific Risk Management’s quantitative modeling focuses on changes in profitability and cash flows of a company’s portfolio of both financial and non-financial assets and liabilities.

Quantitative risk modeling for clients supports our Treasury Policy and strategic risk advice and can be tailored to meeting the unique requirements of our clients. The models are particularly well suited to clients with significant exposures to foreign exchange, interest rates and traded commodities. The statistical characteristics of these pricing variables are estimated from observed historical prices, current market prices and the simulation of alternative financial market price scenarios.

The modeling can also be applied to exposures linked to non-traded commodities. In this case, Asia-Pacific Risk Management works with clients to determine the price characteristics required for the quantitative modeling (forward prices, and their associated volatilities, statistical distributions and correlations).

Simulation models are used to project profitability for various client-determined scenarios based on the statistical modeling of price and volume variables. These simulation techniques can model linear and non-linear risks to produce a comprehensive risk/reward profile of the company’s profitability/cash flows. They also model the extent to which the effects of different financial market risks offset each other, or add to the potential for adverse outcomes.

Our quantitative techniques are flexible in their application, and can be readily applied to quantify:

Levels and likelihood of future cash-flows, profitability or balance sheet impacts implied by various hedging structures.
Sensitivity of cash-flows, profitability or balance sheet to various parameters, and impact of various financial market shocks to parameters.
Effectiveness of different hedging policies.
Model simulation and scenario stress testing allows our clients to tailor the trade off between earnings volatility against average earnings over a multi year period.

Our clients have said that the quantitative risk modeling techniques greatly improve their comprehension of the expected outcomes of current and alternative risk management policies and strategies. Our clients have also found that our models have helped operational senior management to visualise ‘cause and effect’ scenarios when used in conjunction with their strategic plans and competitor analysis. This has successfully resulted in many of our clients observing a reduction of earnings volatility without compromising on consistent and acceptable earnings performance.