The last tools I will consider in this short test on risk management are perhaps the most important of all—stress testing and scenario modelling. Too often, management are able to understand the day-to-day, but are either unwilling or unable to consider what might be considered as unlikely or unexpected. The problem is that we are living in a world where the most unlikely outcomes are appearing to be prevalent; you only need to look at recent election results globally to know that is the case. Consider things such as interest rates and the oil price. Did you see that happening?
Stress testing commences with sensitivity analysis, which looks at the unitary movement of a key variable. Often, this variable will be something ...
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