Which factor influences cash flow at risk?

Cash flow at risk (CFaR) is a financial metric that quantifies the potential for loss in cash flows due to various risk factors. Each of the listed factors—changes in economic policy, market liquidity, and price volatility of underlying assets—plays a significant role in influencing CFaR.

Changes in economic policy can affect interest rates, inflation, and overall economic conditions. These shifts can directly impact a company's operational environment, revenue generation, and consequently its cash flow. For instance, changes in tax policy could alter disposable income for consumers, which, in turn, might reduce a company's sales and cash inflows.

Market liquidity refers to how easily assets can be bought or sold in the market without affecting their price. If market liquidity is low, it may become challenging for a firm to convert assets into cash, affecting its ability to meet short-term obligations and potentially leading to cash flow issues.

Price volatility of underlying assets directly impacts an organization’s revenue streams. For businesses that rely heavily on the prices of commodities or certain market-sensitive assets, fluctuations can lead to unpredictable cash inflows, thereby enhancing the level of cash flow at risk.

In summary, because each of these factors can contribute to the overall risk affecting cash flows, the correct answer highlights their