"FTZ corporation is a U.S. - based multinational. FTZ sells its industrial products in both U.S. and Europe. Cash due from euro-denominated sales is collected on a 90-day deferred basis (i.e. cash due from sales generated in a given quarter is collected at the end of the following quarter). FTZ uses aluminum as the principal raw material. The company buys aluminum throughout the year to use it in its production process. Lastly, FTZ needs $80 million to fund investment operations and is considering raising floating rate debt in the US$ capital market. FTZ plans to raise debt indexed to 3-month interest rates, with a one-year maturity, and plans to issue debt on January 1, 2010. "

Description:
FTZ corporation is a U.S. - based multinational. FTZ sells its industrial products in both U.S. and Europe. Cash due from euro-denominated sales is collected on a 90-day deferred basis (i.e. cash due from sales generated in a given quarter is collected at the end of the following quarter). FTZ uses aluminum as the principal raw material. The company buys aluminum throughout the year to use it in its production process. Lastly, FTZ needs $80 million to fund investment operations and is considering raising floating rate debt in the US$ capital market. FTZ plans to raise debt indexed to 3-month interest rates, with a one-year maturity, and plans to issue debt on January 1, 2010.
Risk management objective:
Estimate the impact of financial risk factors on pre-tax earnings in the upcoming fiscal year.
Financial risk factors/exposures:
Given FTZ operations and objectives we can identify the following risk factors:
a. Foreign exchange risk due to euro-denominated sales
b. Commodity price risk due to aluminum purchases
c. Interest rate risk due to short-term debt financing
In this simplified model we will assume that U.S. sales, non-aluminum expenses and depreciation can be estimated with certainty for the upcoming fiscal year.
Methodology: Corporate-Value-at-Risk (C-VaR)
The methodology provides an estimate of a loss or shortfall of earnings relative to their expected or benchmark value due to consolidated impact of risk factors facing corporation.
Suppose that corporate managers expect or target $100 million in pre-tax earnings in the upcoming fiscal year. After detailed analysis, we estimate that pre-tax earnings may end up below $75 million with 5% chance. Managers believe that 5% chance is a reasonable risk level, as with 95% chance earnings will end up above $75 million. In this case we say that corporate value at risk (C-VaR) is $100 - $75 = $25 million. Because of consolidated risk factors the pre-tax earnings could fall short of the benchmark level by a maximum of $25 million with 95% confidence.
In this example $100 million is our benchmark (B) and $75 million is the worst case result with 95% confidence (T95%). Key question: how can we obtain T95%? There are multiple methods, but we will consider only one: historical bootstrap method.