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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