Scenario Analysis
Testing Resilience for Future Certainty
Traditional risk models like Value-at-Risk (VaR) often fail to capture the dynamics of non-linear payoffs in derivatives or the impact of extreme tail events. By simulating how your investments would react to various economic and market scenarios, we provide a forward-looking view of risk that goes beyond statistical assumptions. This enables you to build a more robust, resilient portfolio and make strategic decisions with confidence.
Simulate sudden, severe market events like flash crashes, sovereign defaults, geopolitical crises, or unexpected central bank policy shifts to measure immediate portfolio P&L impact and liquidity needs.
Test portfolio performance and factor sensitivities across different macroeconomic environments, such as sustained high inflation, deep deflationary spirals, or periods of secular stagnation.
Model 'black swan' scenarios where historically uncorrelated assets move in tandem, revealing hidden vulnerabilities in diversified portfolios and testing for systemic risk amplification.
Core Mitigation Strategies
Strategic Asset Allocation Shifts
Rebalancing portfolio weights to reduce exposure to assets or factors identified as most vulnerable in critical scenarios.
Tail-Risk Hedging Programs
Implementing cost-effective hedging strategies using options (e.g., buying puts on an index) or other derivatives to protect against severe market downturns.
Liquidity & Capital Planning
Refining capital reserves and contingency funding plans to ensure the institution can withstand margin calls and collateral demands during a crisis.
Counterparty Risk Assessment
Stress-testing the creditworthiness of derivatives counterparties (CVA) within each scenario to protect against defaults.
Tactical Ideas & Alpha Generation
Basis Risk Analysis
Identify and quantify the risk that a hedge's value may not move in line with the underlying asset, and design strategies to minimize this risk.
Volatility & Correlation Trading
Structure trades using VIX futures or options to capitalize on periods where our scenario analysis predicts a spike in market volatility or correlation breakdown.
Tactical Opportunity Identification
Highlight assets or strategies that may become attractively priced or act as effective safe havens in specific adverse scenarios, turning risk management into an alpha source.