Question

• Describe scenario analysis in addressing risk.
• What are the things you should be able to do with scenario analysis?
• How does a Tornado Diagram extend the scenario analysis?

Answer 1

Scenario analysis is used for risk assessment and is a very important tool both for risk identification as well as risk management, especially operational risks. Scenario analysis has a forward looking element to it and this assists in identification of key risk exposures in a systematic manner. Scenario analysis also helps in identification of potentially severe events and emerging risks. Thus as a tool scenario analysis can be used to assess risk and then manage it and also serves as an effective way to engage senior management and executive management in the operational risk management process.

The things that I should be able to do with scenario analysis are discussing possible action and risk mitigation strategies on the basis of different scenarios. This will allow me to develop a platform to opine on and then document and track the risks. I will be able to develop a control environment in a systematic manner and eventually be able to create a more effective process.

Tornado Diagram extend the scenario analysis by depicting the sensitivity of a result to the changes in the selected variables. By showing the impact on output when input variables are changed we can see the sensitivity of the result to the changes being made in the selected variables.