^{Redefining Corporate Risk Management}
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MARS - Corporate Risk Advisory Solution

Overview

Medcaps analyze the financial and business risks inherent in a company's treasury operations and propose solutions which enable the company to design and achieve qualitative and quantitative benchmarks. Central to the advisory business is an in-house cashflow modeling tool. The software is used to forecast the company's net cashflows (interest expense on loans and other debt, operating and financial leases, raw material costs, accounts receivable etc) using a simulation technique. This enables the company to identify cashflow mismatches and risks from changes in interest rates, foreign exchange rates, raw material prices etc. Based on the analysis, Medcaps propose derivatives solutions, often highly structured and spanning two or more asset classes, to minimize those risks and achieve the desired profile. The strategies are priced using valuation models developed in-house. The client then executes the strategies with their banks, with our assistance. 

The service

The offering differs from that of our clients' banks in that Medcaps are independent - Medcaps do not have in-house positions and hence no conflict with our clients' interests. Our service consists of: 

Ø Use of our corporate risk advisory model to advise on risk mitigation/yield enhancement techniques

Ø Provide periodic assessments (i.e. sensitivity, revaluations and possible restructuring) of trades executed as well as those in the pipeline. 

Ø Provide a holistic perspective on managing business risk: i.e. instead of concentrating on specific assets classes (e.g. foreign exchange, interest rates), re-focus attention on "natural hedges" (e.g. between raw material prices and exchange rate) and the "big picture" in general. This would involve, for example, showing implications, for every strategy proposed, on overall cost of financing, weighted average cost of capital etc. 

Ø Provided innovative financing alternatives: e.g. asset-based financing as opposed to loans which consume balance sheet and don't earn commensurate returns. Structuring future-flow securitizations of various account receivables .

MARS - model overview

Inputs

• Corporate debt portfolio, leases, accounts receivable etc
• Hedges currently in place (e.g. swaps, options)
• Market rates and volatilities
• Historical market data
• Company financials: share price, EBIT etc and their history 

Rate path generation

• Multi-asset Monte Carlo simulation
• Calibrated to the current market data
• Historically estimated correlation and company specific data. Calibrations "policed" by historically fitted parameters to ensure reasonableness.

Cashflows

• All instruments/exposures stripped to their constituent cashflows using the generated rates
• Judicious forecasts of company-specific variables (expected sales/receivables, inventory etc) using management input and geographical/industrial characteristics.

Outputs

• Portfolio diagnostics (e.g. Fixed/Floating composition, average cost of debt, WACC)
• Simulated interest expense: cumulative and annual, at various percentiles
• Cashflow at Risk (CFaR)
• Hedge efficiency: the relative risk-return profiles with respect to the un-hedged position of the various possible hedged scenarios
• Capital structure implications

Follow the links for model screenshots

MARS Portfolio Analysis

PDFs

Corporate Risk Management Policy 101