scenario

(noun)

A set of factors that can affect the consequences of an action. The environment.

Related Terms

Examples of scenario in the following topics:

  • Scenario Analysis

    • Scenario analysis is a process of analyzing decisions by considering alternative possible outcomes.
    • 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.
    • Many scenario analyses use three different scenarios: base case, worst case and best case.
    • While clearly a bad scenario, it is not realistic enough to be helpful.
    • 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.

  • Risks Involved in Capital Budgeting

    • Another method is scenario analysis, which involves the process of analyzing possible future events by considering alternative possible outcomes.
    • For example, a financial institution might attempt to forecast several possible scenarios for the economy (e.g., rapid growth, moderate growth, slow growth), and it might also attempt to forecast financial market returns (for bonds, stocks, and cash) in each of those scenarios.
    • It might further seek to determine correlations and assign probabilities to the scenarios.
    • The institution can also calculate the scenario-weighted expected return (which figure will indicate the overall attractiveness of the financial environment).
    • It may also perform stress testing, using adverse scenarios.

  • Options Contract

    • Scenario 1: If the spot market price exceeds the $80 strike price, then the company exercises the call options.
    • Then choose the scenario that yields the greater benefit to the option holder.
    • Scenario 1: If the exchange rate exceeds $0.3 US per ringgit, then the investor exercises the call option.
    • Scenario 1: If the exchange rate exceeds $0.8 US / euro, then the investors do not exercise the put option.
    • Scenario 2: If the exchange rate drops lower than $0.8 US / euro, then the investor exercises the put option.

  • Expected Return

    • But in scenario 1, you can expect to lose $0.67 or 67% every time you bet, and in scenario two, you can expect to win $0.83 or 83% with each bet.
    • Even though you lose most of the time you roll in the 2nd scenario, when you win, you win big.
    • If you were foolish enough to play the game in the first scenario 100 times you would expect to be down $67 to your friend.

  • Monte Carlo Simulation

    • Monte Carlo simulation uses statistical data to figure out the average outcome of a scenario based on multiple, complex factors.

  • Reasons for Maintaining Cash on Hand

    • In a worst case scenario, depositors may demand their funds when the bank is unable to generate adequate cash without incurring substantial financial losses.

  • Variance

    • In the figure, we started with three scenarios and a probability (P) and return (R) associated with each.
    • The small number comes from the TC scenario where the stock returns 10%, which is very close to our expectation of 9.25%.

  • Risk Aversion

    • We see when we use the expected payoffs of each scenario we see that each has an expected payoff of 50 dollars.

  • The SML Approach

    • In real market scenarios, we are able to use the SML graph to determine if an asset being considered for a portfolio offers a reasonable expected return for the risk.

  • Modified IRR

    • This is usually an unrealistic scenario and a more likely situation is that the funds will be reinvested at a rate closer to the firm's cost of capital.