Scenario analysis - just an Actuarial thing?
The best way to do Financial projections is to produce scenarios. Start with a best estimate model, identify the main business drivers; say Inflation, Sales, Business Mix etc Shock them up and down and produce worst case scenarios and best case scenarios. Then present management with a funnel of possibilities. See SHELL scenarios, to get an idea!
However, as an Actuary I can attest that this hardly happens in IB. Don't analysts care about these, or is it just an Actuarial thing?
When I was in IB people usually just did three cases. If more detail was wanted, that would happen on request.
Scenario testing is pretty much a pre-requisite on the buyside though, particularly in markets.
I assume the three cases will be; Best estimate, BEST CASE, worst case?
My question here relates to whether it's common in IB to disclose these scenarios in company Financial reports. We (actuaries) have something called an ORSA (Own Risk & Solvency Assessment) through which we disclose scenarios for analysts in Financial reports alongside Embedded Values
Look up the first chicago method, our firm tends to use this methodology in coming up with a valuation and weighted average f/s.
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