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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

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

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

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