Chance‐Constrained Financing as a Response to Financial Risk

The results of a recent survey suggest that many decision makers view financial risk in a safety‐first context. Imposing safety‐first chance constraints on potential financial ratios or flows can be difficult with traditional methods. This is particularly true with financial ratios when both the numerator and denominator are random and are affected by endogenous decisions. A model and numerical example are presented which enforce probabilistic or chance constraints upon potential debt/asset ratios in a multiperiod linear program. The model can be easily modified to probabilistically constrain alternative financial performance measures such as current ratios, working ratios, or cash flows.