scenario analysis

(noun)

a process of analyzing possible future events by considering alternative possible outcomes

Related Terms

Examples of scenario analysis in the following topics:

  • Scenario Analysis

    • Scenario analysis is a process of analyzing decisions by considering alternative possible outcomes.
    • Scenario analysis is a strategic process of analyzing decisions by considering alternative possible outcomes (sometimes called "alternative worlds").
    • For example, a firm might use scenario analysis to determine the net present value (NPV) of a potential investment under high and low inflation scenarios.
    • The purpose of scenario analysis is not to identify the exact conditions of each scenario; it just needs to approximate them to provide a plausible idea of what might happen.
    • This scenario analysis shows how changes in factors like yield and transport cost can affect profits.

  • Risks Involved in Capital Budgeting

    • One such way is to conduct a sensitivity analysis.
    • A related practice is uncertainty analysis which focuses rather on quantifying uncertainty in model output.
    • Ideally, uncertainty and sensitivity analysis should be run in tandem.
    • Another method is scenario analysis, which involves the process of analyzing possible future events by considering alternative possible outcomes.
    • It may also perform stress testing, using adverse scenarios.

  • Monte Carlo Simulation

    • Monte Carlo simulation uses statistical data to figure out the average outcome of a scenario based on multiple, complex factors.
    • As the number of factors increases, it becomes harder to figure out the "base case. " Statistical analysis through Monte Carlo simulations is great at handling problems with multiple, inter-related, and uncertain factors.

  • Inputs

    • This usually involves the preparation of detailed company specific models used for decision making purposes and financial analysis.
    • Time series analysis comprises methods for analyzing time series data in order to extract meaningful statistics and other characteristics of the data.
    • Analysis of cross-sectional data usually consists of comparing the differences among the subjects.
    • Panel analysis uses panel data to examine changes in variables over time and differences in variables between subjects.
    • Judgmental forecasting methods incorporate intuitive judgements, opinions and subjective probability estimates, such as Composite forecasts, Delphi method, Forecast by analogy, Scenario building, Statistical surveys and Technology forecasting.

  • Trend Analysis

    • In addition to using financial ratio analysis to compare one company with others in its peer group, ratio analysis is often used to compare the company's performance on certain measures over time.
    • Trend analysis can be performed in different ways in finance.
    • Fundamental analysis, on the other hand, relies not on sentiment measures (like technical analysis) but on financial statement analysis, often in the form of ratio analysis.
    • Creditors and company managers also use ratio analysis as a form of trend analysis.
    • Analyze the benefits and challenges of using trend analysis to evaluate a company

  • Interest Rate Parity Theorem

    • However, this analysis assumes arbitrage brings the two investments into equality.
    • Therefore, this analysis assumes a country with a higher interest rate possesses a depreciating currency.
    • Consequently, two different scenarios yield the same equation.
    • Although the domestic country is the United States for this investor, we reversed the exchange rate to conform to this analysis.

  • Steps Required to Forecast

    • By completing these scenarios you gain an insight into the various risks that a business faces.

  • Factors that Shift Demand and Supply Functions

    • In a worst-case scenario, a depreciating currency triggers a capital flight.
    • Supply and demand analysis could be ambiguous in some cases.

  • Balance Sheet Analysis

    • Balance sheet analysis is process of understanding the risk and profitability of a firm through analysis of reported financial information.
    • Balance sheet analysis consists of 1) reformulating reported Balance sheet, 2) analysis and adjustments of measurement errors, and 3) financial ratio analysis on the basis of reformulated and adjusted Balance sheet.
    • Two types of ratio analysis are performed: 3.1) Analysis of risk and 3.2) analysis of profitability:
    • Risk analysis consists of liquidity and solvency analysis.
    • Cash flow analysis is also useful.

  • Interpreting Ratios and Other Sources of Company Information

    • Financial statement analysis, also known as financial analysis, is the process of understanding the risk and profitability of a company through the analysis of that company's reported financial information.
    • There are four methods for making these types of comparisons: vertical analysis, horizontal analysis, ratios, and trend percentages.
    • In a vertical analysis, each item is expressed as a percentage of a significant total.
    • This type of analysis is especially helpful in analyzing income statement data .
    • In vertical analysis each item is expressed as a percentage of a significant total.