What does the term 'earnings at risk' refer to?

The term 'earnings at risk' specifically pertains to the sensitivity of a firm's earnings to changes in interest rates. This concept measures the potential impact that fluctuations in interest rates can have on a company's earnings. It signifies how much the earnings can vary or be at risk due to shifts in the financial landscape, particularly within the context of the firm's existing financial instruments and leverage.

A change in interest rates can affect not just the interest expenses on debt, but also the returns on certain assets, which can lead to significant variations in earnings. Understanding this allows firms to assess their exposure to changes in market conditions and manage that risk appropriately.

The other options, while they touch on aspects related to finance and investment, do not accurately encapsulate the definition of 'earnings at risk.' For instance, discussing total capital required for investments focuses more on capital structure than on earnings variability. Similarly, defining maximum potential earnings or earnings from high-risk investments does not address how interest rate changes impact earnings, which is at the core of what 'earnings at risk' aims to quantify.