Crucial Analytics -
Generic Risk Platform and Model
Making Risk Visible
The most basic assessment of commercial risk can be presented by the situation illustrated below where there is an uncertain cost stream (pink) and an uncertain revenue stream (blue) intended to cover it.
A visualisation of risk
These envelopes could represent the total cost and revenue streams of a business, or just some selected components. The envelopes define the range of values possible under the conditions specified. For many situations, the expected mean values will probably lie near the central lines of the envelopes. The areas where these envelopes overlap can be used as a measure of the risk attached to the situation, and reflect conditions where the revenue fails to cover the costs (the mauve area).
However complex the output of any particular model may be, the underlying principles are usually very similar.
A Generic Platform
Crucial's generic platform can provide the basic requirements for exploring the behaviour of many models within a risk environment. It provides a stochastic analysis, based on the Monte Carlo approach, which can generate a randomly evolving environment appropriate to a variety of problems and through which those problems may be viewed.
This environment may be based around current forecasts for the critical parameters that define it, and the historically observed volatilities attached to those parameters.
The problem of interest must first be modelled. The quality of the model will profoundly determine the value of the analysis and is usually best constructed at a level where the risks are most readily apparent and most easily defined.
Both model and environment may vary from problem to problem but the same Crucial generic platform may be used to generate a variety of environments in which that model can operate.
This process will always be a compromise between analytical complexity and practical insight.
The objective is to examine the uncertainty in the output from the model for the parameter that is relevant to the decisions being made.