Scenario analysis and Monte Carlo simulation

Question 1

• Cash flow sensitivity over key value driver.
• Identification of most relevant key value driver.
• No interdependence between variables.
• In practice: identification of optimistic and pessimistic value for key value driver.

The above characterize

a) Asset side analysis
b) Scenario analysis
c) Sensitivity analysis
d) Company analysis

Answer 1

c) Sensitivity analysis

Question 2

• Identification of alternative market scenario (i.e., ‘different world’)
• Impact of interrelations between variables
• Understanding/ model macroeconomic/ finance variables

The above characterize

a) Asset side analysis
b) Scenario analysis
c) Sensitivity analysis
d) Company analysis

Answer 2

b) Scenario analysis

Question 3

Define the role of Monte Carlo simulation.

Answer 3

Monte Carlo simulation solves mathematical problems that are impossible to solve in analytical terms or in other words solve problems in stochastic world.

Question 4

Regarding main components of financial modeling. Match the definitions and descriptions.

a) Input defined by analyst
b) Exogenous variables with a defined distribution function.
c) The results of the simulation.
d) Mathematical equations that describe the relationship between deterministic variables, stochastic variables and correlation between stochastic inputs and outcomes.

i) Output variables
ii) Deterministic input variables
iii) Model
iiii) Stochastic input variables

Answer 4

(a) - (ii)
(b) - (iiii)
(c) - (i)
(d) - (iii)