Forecasting 

is the process of making statements about events whose actual outcomes (typically) have
not yet been observed. A commonplace example might be estimation of the expected value for some
variable of interest at some specified future date. Prediction is a similar, but more general term. Both
might refer to formal statistical methods employing time series, cross-sectional or longitudinal data, or
alternatively to less formal judgemental methods. 

Forecasting is the establishment of future expectations by the analysis of past data, or the formation
of opinions.

Forecasting is an essential element of capital budgeting

Capital budgeting requires the commitment of significant funds today in the hope of long term
benefits. The role of forecasting is the estimation of these benefits.

Techniques:

Qualitative and quantitative

 Delphi method
 Nominal group technique
 Jury of executive opinion
 Scenario projection

 Simple regressions
 Multiple regressions
 Time trends
 Moving averages

Quantitative forecasting uses historical data to establish relationships and trends which can be
projected into the future

Qualitative forecasting uses experience and judgment to establish future behaviours

Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to

an assessment of the viability, stability and profitability of a business, sub-business or project.

It is performed by professionals who prepare reports using ratios that make use of information taken
from financial statements and other reports. These reports are usually presented to top management as
one of their bases in making business decisions. Based on these reports, management may:

 Continue or discontinue its main operation or part of its business;

 Make or purchase certain materials in the manufacture of its product;
 Acquire or rent/lease certain machineries and equipment in the production of its goods;
 Issue stocks or negotiate for a bank loan to increase its working capital;
 Make decisions regarding investing or lending capital;
 Other decisions that allow management to make an informed selection on various alternatives in
the conduct of its business.

Goals
Financial analysts often assess the firm's:

1. Profitability - its ability to earn income and sustain growth in both short-term and long-term. A
company's degree of profitability is usually based on theincome statement, which reports on the
company's results of operations;

2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;
3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;

Both 2 and 3 are based on the company's  balance sheet, which indicates the financial condition of a
business as of a given point in time.

4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant
losses in the conduct of its business. Assessing a company's stability requires the use of both the income
statement and the balance sheet, as well as other financial and non-financial indicators.

Methods
Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.):

 Past Performance - Across historical time periods for the same firm (the last 5 years for
example),
 Future Performance - Using historical figures and certain mathematical and statistical
techniques, including present and future values, This extrapolation method is the main source of
errors in financial analysis as past statistics can be poor predictors of future prospects.
 Comparative Performance - Comparison between similar firms.
These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and
/ or the income statement, by another, for example :

Net income / equity = return on equity (ROE)

Net income / total assets = return on assets  (ROA)
Stock price / earnings per share = P/E ratio

Comparing financial ratios is merely one way of conducting financial analysis. Financial

ratios face several theoretical challenges:

 They say little about the firm's prospects in an absolute sense. Their insights about
relative performance require a reference point from other time periods or similar
firms.
 One ratio holds little meaning. As indicators, ratios can be logically interpreted in at
least two ways. One can partially overcome this problem by combining several
related ratios to paint a more comprehensive picture of the firm's performance.
 Seasonal factors may prevent year-end values from being representative. A ratio's
values may be distorted as account balances change from the beginning to the end
of an accounting period. Use average values for such accounts whenever possible.
 Financial ratios are no more objective than the accounting methods employed.
Changes in accounting policies or choices can yield drastically different ratio values.
 They fail to account for exogenous factors like investor behavior that are not based
upon economic fundamentals of the firm or the general economy (fundamental
analysis) [1].

Financial analysts can also use percentage analysis which involves reducing a series of figures as a
percentage of some base amount[2]. For example, a group of items can be expressed as a percentage of
net income. When proportionate changes in the same figure over a given time period expressed as a
percentage is known as horizontal analysis[3]. Vertical or common-size analysis, reduces all items on a
statement to a “common size” as a percentage of some base value which assists in comparability with
other companies of different sizes [4].

Another method is comparative analysis. This provides a better way to determine trends. Comparative
analysis presents the same information for two or more time periods and is presented side-by-side to
allow for easy analysis.[5].
What is corporate financial planning
A man has financial goal to raise their wealth moreover a company. The company should have
financial goals to increase the profit. For example, an increasing sales 10% for this year. To reach
the goal, the company should know their financial planning.

The function of corporate financial planning is for guidelines for change in the firm. The corporate
financial planning also important to face unexpected in future. The financial planning usually. The
planning are included:

1. The company financial goals. Most company goals is growth. No one company which want to be
stagnant. For example, increasing sales up to 20%, considering the previous year sales.

2. The difference financial goals with financial current condition. The business is uncertain things
and unpredictable. There is also a discrepancy between the reality and the plan. Sometimes, the
current condition is better than the goals or reversely.

3. The recommendation for company action to meet financials goals. The planning can list what
company should do e.g. increasing promotion and advertising, increasing a product, closing the
showroom, cutting the expenses, and others.

4. The assumption or scenario of financial planning. Sometimes we are difficult to make it. There are
at least three scenario like worst, normal and best. Worst means the worst possible current condition
for the company. Normal means the possible current condition is almost similar with financial
planning. God time means the current condition possible is better than financial planning. 

The company has some project in their company. Each project has different planning. To simplify
those project planning, the company arrange it to corporate financial planning.

With this financial planning, the company know the direction of the company. They can run any
company projects well. They can do the profit project and delay the loss project.

The scenario analysis also help us to avoid loss or anticipate loss. We know the risk and we can
provide some money if our project loss. If we cannot measure the risk and anticipate the risk, our
company may be bankrupt. It because the project is fail and there is no money to cover the loss.

Financial modeling is the task of building an abstract representation (a model) of a financial decision

making situation.[1] This is a mathematical model designed to represent (a simplified version of) the
performance of a financial asset or a portfolio, of a business, a project, or any other investment. Financial
modeling is a general term that means different things to different users; the reference usually relates
either to accounting applications, or to quantitative finance applications. While there has been some
debate in the industry as to the nature of financial modeling - whether it is atradecraft, such as welding, or
a science, the task of financial modeling has been gaining acceptance and rigor over the years.
Short-Term Financial Plan
A financial plan outlining investment and other financial goals for the coming fiscal year. Short-term
financial plans involve less uncertainty than long-term financial plans because, generally
speaking, market trends are more easily predictable in the short term. Likewise, short-term financial plans
are more easily amendable as a result of the short time frame. Short-term financial plans usually invest in
short-lived securities, such as T bills. A short-term financial plan aims to achieve goals that would be
beneficial for one's long-term financial plan.

Working capital policy

(1) MATCHING OR HEDGING APPROACH/POLICY

 

 This approach or policy is a moderate policy that matches

assets and liabilities to maturities.

 Basically, a firm uses long term sources to finance fixed

assets and permanent current assets and short term financing
to finance temporary current assets

 Simple illustration:

 A fixed asset/equipment which is expected to

provide cash flow for 8 years should be financed by say 8
years long-term debts

 Assuming a firm needs to have additional inventories for 2

months, it will then sought short term 2 months bank credit to
match it.

 
 (2) CONSERVATIVE APPROACH/POLICY
 

 Conservative because the firm prefers to have more cash on

hands

 Fixed and part of current assets are financed by long-term or

permanent funds

 As permanent or long-term sources are more expensive, this

leads to “lower risk lower return”

 Having excess cash at off-peak period hence the need to

invest the idle or excess cash to earn returns.

(3) AGGRESSIVE APROACH/POLICY

 The firm want to take high risk where short term funds are used to
a very high degree to finance current and even fixed assets

Financial management decisions are divided into the management of assets (investments)
and liabilities (sources of financing), in the long-term and the short-term. It is common
knowledge that a firm's value cannot be maximized in the long run unless it survives the
short run. Firms fail most often because they are unable to meet their working capital
needs; consequently, sound working capital management is a requisite for firm survival.

About 60 percent of a financial manager's time is devoted to working capital management,

and many of the potential employees in finance-related fields will find out that their first
assignment on the job will involve working capital. For these reasons, working capital policy
and management is an essential topic of study. In many text books working capital refers to
current assets, and net working capital is defined as current assets minus current liabilities.
Working capital policy refers to decisions relating to the level of current assets and the way
they are financed, while working capital management refers to all those decisions and
activities a firm undertakes in order to manage efficiently the elements of current assets.

The term working capital originated with the old Yankee peddler, who would load up his
wagon with goods and then go off on his route to peddle his wares. The merchandise was
called working capital because it was what he actually sold, or "turned over", to produce his
profits. The wagon and horse were his fixed assets. He generally owned the horse and
wagon, so they were financed with "equity" capital, but he borrowed the funds to buy the
merchandise. These borrowings were called working capital loans, and they had to be repaid
after each trip to demonstrate to the bank that the credit was sound. If the peddler was
able to repay the loan, then the bank would issue another loan, and these were sound
banking practices. The days of the Yankee peddler have long since pasted, but the
importance of working capital remains. Current asset management and short-term financing
are still the two basic elements of working capital and a daily headache for the financial
managers.

Working capital, sometimes called gross working capital, simply refers to the firm's total
current assets (the short-term ones), cash, marketable securities, accounts receivable, and
inventory. While long-term financial analysis primarily concerns strategic planning, working
capital management deals with day-to-day operations. By making sure that production lines
do not stop due to lack of raw materials, that inventories do not build up because
production continues unchanged when sales dip, that customers pay on time and that
enough cash is on hand to make payments when they are due. Obviously without good
working capital management, no firm can be efficient and profitable.

Statements about the flexibility, cost, and riskiness of short-term debt versus long-term
debt depend, to a large extent, on the type of short-term credit that actually is used. Short-
term credit is defined as any liability originally scheduled for payment within one year.
There are numerous sources of short-term funds, such as accruals, accounts payable (trade
credit), bank loans, and commercial paper. The major elements of current liabilities are
trade creditors and bank overdrafts, and these are further analyzed.

Accounts Receivable

When a business extends credit to its customers, it records a revenue transaction at the
time it provides its customer with goods or services. The transaction results in a revenue
account increase and an increase in an asset account. Since no cash is received, the asset
account that is increased is Accounts Receivable.

Example. When Joint Ventures made its December delivery the Columbian Grower’s Co-op
did not pay the balance owed until January. When the delivery was completed the Co-op
had an obligation to pay Joint Ventures for its services. Joint Ventures completed the
$50,000 delivery on December 20. Recall that the Co-op had already paid $5,000 on the
delivery, so on December 20 the following journal entry would be made: 

Accounts Receivable is an asset account. Notice that no cash account was involved in the
transaction, because no cash changed hands. An asset account was increased and equity
(revenue) was increased. If on January 5 the Co-op paid the $45,000 owed, the transaction
would be recorded in this way: 
Notice that no revenue account was affected by the January payment. This is because the
revenue was recorded in December 2004, when Joint Ventures actually earned it. In
January, all that happened was that one asset account, Cash, increased, while another asset
account, Accounts Receivable, decreased. 

Accounts Payable

Just as a business extends credit to its customers, other firms may extend credit to it. When
a business receives goods or services but does not pay immediately, it incurs a liability
called accounts payable. Using an accrual basis of accounting, a business records the
purchase of goods or services in the period when they are used, not necessarily when cash
is paid.

Example. Say that Joint Ventures was granted credit by an office supply store to purchase
$600 of office supplies at the end of December 2004. Joint Ventures received and used the
office supplies in that month. Joint Ventures actually paid for the supplies in January 2005.
The entry at the date of purchase is: 

Office Supplies, an expense account, has increased while a liability account, Accounts
Payable, has also increased. Remember, when an expense is incurred, equity decreases.
What actually happens is that a liability account increases and an equity account decreases,
so the fundamental accounting equation is maintained. When Joint Ventures pays cash for
what it owes in January 2005, the following entry is made: 

In this transaction a decrease in an asset (Cash), is offset by a decrease in a liability

(Accounts Payable). No expense is recognized in 2005 because the supplies were used in
2004. The net effect of these two transactions is that Joint Ventures recognized the expense
when it used the supplies, rather than when it actually paid for them.
Inventory is a list for goods and materials, or those goods and materials themselves, held available in
stock by a business. It is also used for a list of the contents of a household and for a list
fortestamentary purposes of the possessions of someone who has died. In accounting, inventory is
considered an asset.

In business management, inventory consists of a list of goods and materials held available in stock.

In accounting, liquidity (or accounting liquidity) is a measure of the ability of a debtor to pay his debts

as and when they fall due. It is usually expressed as a ratio or a percentage of currentliabilities.

For a corporation with a published balance sheet there are various ratios used to calculate a measure of
liquidity. These include the following:

 the current ratio, which is the simplest measure and is calculated by dividing the total current
assets by the total current liabilities. A value of over 100% is normal in a non-banking corporation.
However, some current assets are more difficult to sell at full value in a hurry.
 the quick ratio - calculated by deducting inventories and prepayments from current assets and
then dividing by current liabilities - gives a measure of the ability to meet current liabilities from assets
that can be readily sold. A better way for a trading corporation to meet liabilities is from cash flows,
rather than through asset sales, so;
 the operating cash flow ratio can be calculated by dividing the operating cash flow by current
liabilities. This indicates the ability to service current debt from current income, rather than through
asset sales.

In United States banking, cash management, or treasury management, is a marketing term for certain

services offered primarily to larger business customers. It may be used to describe all bank accounts
(such as checking accounts) provided to businesses of a certain size, but it is more often used to describe
specific services such as cash concentration, zero balance accounting, andautomated clearing
house facilities. Sometimes, private banking customers are given cash management services.

[edit]Cash management services generally offered

The following is a list of services generally offered by banks and utilised by larger businesses and
corporations:

 Account Reconcilement Services: Balancing a checkbook can be a difficult process for a very
large business, since it issues so many checks it can take a lot of human monitoring to understand
 which checks have not cleared and therefore what the company's true balance is. To address this,
banks have developed a system which allows companies to upload a list of all the checks that they
issue on a daily basis, so that at the end of the month the bank statement will show not only which
checks have cleared, but also which have not. More recently, banks have used this system to prevent
checks from being fraudulently cashed if they are not on the list, a process known as positive pay.

 Advanced Web Services: Most banks have an Internet-based system which is more advanced
than the one available to consumers. This enables managers to create and authorize special internal
logon credentials, allowing employees to send wires and access other cash management features
normally not found on the consumer web site.

 Armored Car Services (Cash Collection Services): Large retailers who collect a great deal of
cash may have the bank pick this cash up via an armored car company, instead of asking its
employees to deposit the cash.

 Automated Clearing House: services are usually offered by the cash management division of a
bank. The Automated Clearing House is an electronic system used to transfer funds between banks.
Companies use this to pay others, especially employees (this is how direct deposit works). Certain
companies also use it to collect funds from customers (this is generally how automatic payment plans
work). This system is criticized by some consumer advocacy groups, because under this system
banks assume that the company initiating the debit is correct until proven otherwise.

 Balance Reporting Services: Corporate clients who actively manage their cash balances
usually subscribe to secure web-based reporting of their account and transaction information at their
lead bank. These sophisticated compilations of banking activity may include balances in foreign
currencies, as well as those at other banks. They include information on cash positions as well as
'float' (e.g., checks in the process of collection). Finally, they offer transaction-specific details on all
forms of payment activity, including deposits, checks, wire transfers in and out, ACH (automated
clearinghouse debits and credits), investments, etc.

 Cash Concentration Services: Large or national chain retailers often are in areas where their
primary bank does not have branches. Therefore, they open bank accounts at various local banks in
the area. To prevent funds in these accounts from being idle and not earning sufficient interest, many
of these companies have an agreement set with their primary bank, whereby their primary bank uses
the Automated Clearing House to electronically "pull" the money from these banks into a single
interest-bearing bank account.
 Lockbox - Retail: services: Often companies (such as utilities) which receive a large number of
payments via checks in the mail have the bank set up a post office box for them, open their mail, and
deposit any checks found. This is referred to as a "lockbox" service.

 Lockbox - Wholesale: services: are for companies with small numbers of payments, sometimes
with detailed requirements for processing. This might be a company like a dentist's office or small
manufacturing company.

 Positive Pay: Positive pay is a service whereby the company electronically shares its check
register of all written checks with the bank. The bank therefore will only pay checks listed in that
register, with exactly the same specifications as listed in the register (amount, payee, serial number,
etc.). This system dramatically reduces check fraud.

 Reverse Positive Pay: Reverse positive pay is similar to positive pay, but the process is
reversed, with the company, not the bank, maintaining the list of checks issued. When checks are
presented for payment and clear through the Federal Reserve System, the Federal Reserve prepares
a file of the checks' account numbers, serial numbers, and dollar amounts and sends the file to the
bank. In reverse positive pay, the bank sends that file to the company, where the company compares
the information to its internal records. The company lets the bank know which checks match its
internal information, and the bank pays those items. The bank then researches the checks that do not
match, corrects any misreads or encoding errors, and determines if any items are fraudulent. The
bank pays only "true" exceptions, that is, those that can be reconciled with the company's files.

 Sweep accounts: are typically offered by the cash management division of a bank. Under this
system, excess funds from a company's bank accounts are automatically moved into a money market
mutual fund overnight, and then moved back the next morning. This allows them to earn interest
overnight. This is the primary use of money market mutual funds.

 Zero Balance Accounting: can be thought of as somewhat of a hack. Companies with large
numbers of stores or locations can very often be confused if all those stores are depositing into a
single bank account. Traditionally, it would be impossible to know which deposits were from which
stores without seeking to view images of those deposits. To help correct this problem, banks
developed a system where each store is given their own bank account, but all the money deposited
into the individual store accounts are automatically moved or swept into the company's main bank
account. This allows the company to look at individual statements for each store. U.S. banks are
almost all converting their systems so that companies can tell which store made a particular deposit,
 even if these deposits are all deposited into a single account. Therefore, zero balance accounting is
being used less frequently.

 Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can be done by a
simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often
the most expedient method for transferring funds between bank accounts. A bank wire transfer is a
message to the receiving bank requesting them to effect payment in accordance with the instructions
given. The message also includes settlement instructions. The actual wire transfer itself is virtually
instantaneous, requiring no longer for transmission than a telephone call.

 Controlled Disbursement: This is another product offered by banks under Cash Management
Services. The bank provides a daily report, typically early in the day, that provides the amount of
disbursements that will be charged to the customer's account. This early knowledge of daily funds
requirement allows the customer to invest any surplus in intraday investment opportunities, typically
money market investments. This is different from delayed disbursements, where payments are issued
through a remote branch of a bank and customer is able to delay the payment due to increased float
time.

Marketable Securities

What Does Marketable Securities Mean?

Very liquid securities that can be converted into cash quickly at a reasonable price. 

Marketable securities are very liquid as they tend to have maturities of less than one year. Furthermore,
the rate at which these securities can be bought or sold has little effect on their prices. 

Repo rate is the interest rate at which the reserve bank of

India lends mney to other banks.

Reverse repo rate is return banks earn on excess funds

parked with the central bank against Government securities.
 

Repo rate is the discounting rate at which central bank

borrows security from commercial bank.Repo means repurchase
agreement b/w RBI &commercial bank.

Reverse repo is the rediscounting rate at which commercial

bank borrows discounted security from central bank ie RBI.
repo rate is the rate at which RBI lends money to other
commercial banks.

and Reverse repo rate as the name suggests is the Rate at

which RBI borrows from other commercial banks.
 

What is Bank rate?   Bank Rate is the rate at which central bank of the country  (in India it is
RBI)  allows finance to commercial banks. Bank Rate is a tool, which central bank  uses for
short-term purposes. Any upward revision in Bank Rate by central bank is an indication that
banks should also increase deposit rates as well as Prime Lending Rate. This any revision in the
Bank rate indicates could mean more or less interest on your deposits and also an increase or
decrease in your EMI.

What is Bank Rate ? (For Non Bankers)  : This is the rate at which central bank (RBI)  lends
money to other banks or financial institutions.   If the bank rate goes up, long-term interest rates also
tend to move up, and vice-versa. Thus, it can said that in case bank rate  is hiked,  in all likelihood
banks will hikes their own lending rates to ensure and they continue to make a profit.

What is CRR?    The Reserve Bank of India (Amendment) Bill, 2006 has been enacted
and has come into force with its gazette notification. Consequent upon amendment to
sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the
monetary stability in the country, can prescribe Cash Reserve Ratio (CRR) for
scheduled banks without any floor rate or ceiling rate.  [Before the enactment of this
amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could
prescribe CRR for scheduled banks between 3 per cent and 20 per cent of total of their
demand and time liabilities].

RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from
time to time. Increase in CRR means that banks have less funds available and money is sucked
out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures that a portion
of bank deposits is totally risk-free, but also enables RBI to  control liquidity in the system, and thereby,
inflation by tying the  hands of the banks in lending money.

What is CRR (For Non Bankers)  : CRR means Cash Reserve Ratio.  Banks in India are
required to hold a certain proportion of their deposits in the form of  cash.  However, actually
Banks  don’t hold these as cash with themselves, but deposit such case with Reserve Bank of
India (RBI) / currency chests, which is considered as  equivlanet to holding cash with
themselves.. This minimum ratio (that is the part of the total deposits  to be held as cash) is
stipulated by the RBI and is known as the CRR or  Cash Reserve Ratio.  Thus, When a bank’s
deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold
additional Rs 9 with  RBI and Bank will be able to use only Rs 91 for investments and
lending / credit purpose. Therefore,  higher the  ratio (i.e. CRR), the lower is the amount that
banks will be able to  use for lending and investment.  This power of RBI to reduce the
lendable amount by increasing the CRR,  makes it an instrument in the hands of a central
bank through which it can control the amount that banks lend.  Thus, it is a tool used by RBI
to control liquidity in the banking system.

What is SLR? Every bank is required to maintain at the close of business every day, a minimum
proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold
and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities
is known as Statutory Liquidity Ratio (SLR). Present SLR is 24%. (reduced w.e.f. 8/11/208, 
from earlier 25%) RBI is empowered to increase this ratio up to 40%.  An increase in SLR  also
restrict the bank’s leverage position to pump more money into the economy.

What is SLR ? (For Non Bankers)  : SLR stands for Statutory Liquidity Ratio. This term is
used by bankers and indicates  the minimum percentage of deposits that the bank has to
maintain in form of gold, cash or other approved securities.  Thus, we can say that it is ratio
of cash and some other approved to liabilities (deposits) It regulates the credit growth in
India. 

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When
the repo rate increases borrowing from RBI becomes more expensive.  Therefore, we can say
that in case,  RBI wants to make it more expensive for the banks to borrow money, it increases the repo
rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the
RBI.  The RBI uses this tool when it feels there is too much money floating in the banking system.  An
increase in the reverse repo rate  means that the RBI will borrow money from the banks at a higher rate 
of interest. As a result, banks would prefer to keep their money with the RBI

In banking, asset and liability management is the practice of managing risks that arise due to

mismatches between the assets and liabilities (debts and assets) of the bank. This can also be seen in
insurance.

Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk. Asset
Liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk
faced by banks, other financial services companies and corporations.

Banks manage the risks of Asset liability mismatch by matching the assets and liabilities according to the
maturity pattern or the matching the duration, by hedging and by securitization. Much of the techniques
for hedging stem from the delta hedging concepts introduced in the Black-Scholes model and in the work
of Robert C. Merton and Robert A. Jarrow. The early origins of asset and liability management date to the
high interest rate periods of 1975-6 and the late 1970s and early 1980s in the United States. Van
Deventer, Imai and Mesler (2004), chapter 2, outline this history in detail.
Modern risk management now takes place from an integrated approach to enterprise risk
management that reflects the fact that interest rate risk, credit risk, market risk, and liquidity risk are all
interrelated. The Jarrow-Turnbull model is an example of a risk management methodology that integrates
default and random interest rates. The earliest work in this regard was done by Robert C. Merton.
Increasing integrated risk management is done on a full mark to market basis rather than the accounting
basis that was at the heart of the first interest rate sensivity gap and duration calculations.

In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used risk

measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio,probability and
time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on
the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in
the portfolio) is the given probability level.[1]

For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05 probability that
the portfolio will fall in value by more than $1 million over a one day period, assuming markets are normal
and there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day in 20.
A loss which exceeds the VaR threshold is termed a “VaR break.”[2]

The 5% Value at Risk of a hypothetical profit-and-loss probability density function

VaR has five main uses in finance: risk management, risk measurement, financial control,financial
reporting and computing regulatory capital. VaR is sometimes used in non-financial applications as well.[3]

Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money,[1] or, money
earned by deposited funds.[2] Assets that are sometimes lent with interest
include money,shares, consumer goods through hire purchase, major assets such as aircraft, and even
entire factories in finance lease arrangements. The interest is calculated upon the value of the assets in
the same manner as upon money. Interest can be thought of as "rent of money". When money is
deposited in a bank, interest is typically paid to the depositor as a percentage of the amount deposited;
when money is borrowed, interest is typically paid to the lender as a percentage of the amount owed. The
percentage of the principal that is paid as a fee over a certain period of time (typically one month or year),
is called the interest rate.

Interest is compensation to the lender, and for forgoing other useful investments that could have been
made with the loaned asset. These forgone investments are known as the opportunity cost. Instead of the
lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit
of using the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the
fee paid by the borrower for the privilege. Interest also compensates the lender for the risk of losing the
principal, called credit risk. In economics, interest is considered the price of credit.