Scenario analysis and sensitivity testing

Question 1

What is Scenario Analysis

Answer 1

Scenario analysis is a method used in finance (and many other disciplines) to
assess potential future events by considering various feasible alternative
future outcomes or scenarios

Question 2

Why is Scenario Analysis Important?

Answer 2

Risk Management
Strategic Planning
Enhanced Decision Making

Question 3

Components of Scenario Analysis

Answer 3

Base Case
Worst case
best case

Question 4

Differentiating Between Scenario Analysis and Forecasting

Answer 4

• Forecasting: It involves predicting a specific outcome based on
  available data and assumed trends. It typically provides a single outlook,
  often in the form of projected figures.
• Scenario Analysis: Rather than predicting a particular outcome,
  scenario analysis explores a range of potential outcomes without
  necessarily assigning a probability to any given scenario.

Question 5

The Process of Scenario Analysis

Answer 5

1. Define Scope
2. Identify Key variables
3. Develop Different Scenarios
4. Assess the Impact
5. Review and Update

Question 6

Creating Scenarios

Answer 6

• Define Objective
• Identify Key Variables and Drivers
• Develop Structures Scenarios
  Best Case
  Worst case
  Probable case
  Alternative Scenarios
• Utilize Tools and Software

Question 7

Introduction to Sensitivity Analysis

Answer 7

is a technique to
determine how different values of an independent variable can impact a
particular dependent variable under a given set of assumptions

Question 8

Conducting Sensitivity Analysis

Answer 8

• Select Variables for Testing
• Determine the range
• Run the Analysis
• Visualize Results

Question 9

Benefits of Sensitivity Analysis

Answer 9

• Robust Decision Making
• Risk Identification
• Resource Allocation

Question 10

Limitations and Cautions

Answer 10

Overreliance
Garbage in, Garbage out

Question 11

The Nature of Market Conditions

Answer 11

• Supply and Demand Dynamics
• Macroeconomic Indicator
• Investor Sentiment
• Regulatory Environment
• Geopolitical Events

Question 14

Tools and Metrics for Evaluating Changes

Answer 14

• Economic Indicators Dashboard
• Technical analysis
• Fundamental analysis
• Sentiment analysis

Question 15

Impact of Changing Market Conditions

Answer 15

• Asset valuation
• Liquidity Conditions
• Shift in Investment Strategies
• Cost of Capitalp

Question 16

Developing a Responsive Strategy

Answer 16

• Diversification
• Stress Testing
• Continuous Monitoring
• Scenatio Planning

Question 17

Understanding Operating Assumptions

Answer 17

Definition
Role of Financial Modeling

Question 18

Sources of Changes in Operating Assumptions

Answer 18

• Market Dynamics
• Regulatory Shifts
• Internal factors
• Global Events

Question 19

Evaluating the Impact

Answer 19

Sensitivity analysis
Scenario Planning
Feedback Loop Criation

Question 20

Adjusting Financial Models

Answer 20

Model Flexibility
Use of Automated Tools
Continuous Monitoring

Question 21

Implications for Decision Making

Answer 21

Strategic Alignment
Resource Allocation
Risk Management