Profit at Risk (PaR)

Profit at Risk (PaR) is a risk management measure used to estimate the potential loss in profit due to adverse market conditions over a specific time period.

Example

A bank calculates its PaR to determine the maximum potential loss in profit over the next quarter if interest rates were to rise unexpectedly.

Key points

• Measures potential loss in profit due to adverse market conditions.

• Helps businesses understand downside risks to profitability.

• Used for risk management and strategic decision-making.

Quick Answers to Curious Questions

How does PaR differ from Value at Risk (VaR)?

PaR focuses specifically on potential losses in profitability, while VaR measures the overall risk of a portfolio’s value.

Why is Profit at Risk important for businesses?

It helps businesses anticipate potential profit declines and implement strategies to mitigate financial risks.

What factors can influence Profit at Risk?

Factors include market volatility, changes in demand, interest rates, and fluctuations in input costs.