FM5

Question 1

Scenario Analysis Vs. Forecasting

Answer 1

Forecasting - it involves predicting a specific outcome based on available data and assumed trends.

Scenatio Analysis - Rather than predicting particular outcome, it explores a range of potential outcomes without assigning any probability to a given scenario.

Question 2

Why is scenario analysis important?

Answer 2

• Risk Management: helps orgs understand and prepare for adverse situations
• Strategic Planning: allows businesses to explore and plan multiple possible futures
• Enhanced decision making: orgs can make informed choices that optimize oportunities and reduce probability of bad results

Question 3

Components of Scenario Analysis

Answer 3

• Base case
• Worst case
• Best case

Question 4

Process of scenario analysis

Answer 4

1. Define the scope
2. Identify key variables
3. Develop different Scenarios
4. Assess the impact
5. Review and update

Question 5

Conducting Sensitivity Analysis

Answer 5

1. Select variable for testing
2. Determine range
3. Run the analysis
4. Visualize results

Question 6

Sensitivity

Limitations and Cautions

Answer 6

1. Overreliance - while sensitivity provides value, it should not be the sole tool in decision making
2. Garbage in Garbage ou - results are only good as the assumptions you start with.