Working out the impact of a specified set of market or economic events on positions or earnings. Scenarios may be historical or hypothetical.
Where you will meet it
Scenario analysis comes up in 13 learning outcome notes across the FRM syllabus.
A few of them:
Enterprise Risk Management and Future Trends FRM Part I · Foundations of risk management
“Scenario analysis assesses what happens to the firm's earnings, capital or liquidity if a specified combination of risk-factor moves occurs, taken from history or built hypothetically by judgement.”
Calculating and Applying VaR FRM Part I · Valuation and risk models
“Worst-case scenario analysis asks a different question from VaR.”
Credit Derivatives FRM Part II · Credit risk measurement and management
“Real-world probabilities belong in risk management work such as credit VaR, economic capital and scenario analysis, where you want the expected frequency of actual losses.”
Introduction to Operational Risk and Resilience FRM Part II · Operational risk and resilience
“Its parts are governance with a three-lines-of-defence structure, a board-approved risk appetite, risk and control self-assessments, loss data collection, key risk indicators, scenario analysis, reporting and, where required, capital.”
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