Scenario Analysis
Short definition
Scenario analysis compares cash and covenant outputs under coherent assumption sets (base, down, severe). Unlike one-variable sensitivity, FX, rates, demand and collections move together.
Detailed explanation
The upside should not be dressed for approval; the down case should not be discarded as “won’t happen”. Coherence: in an FX shock, margin, NWC and interest break in the same story.
A probability-weighted average does not replace the decision; the threshold (which scenario breaks DSCR) is more useful.
Why it matters for the CFO
If investment and credit are taken on one base sentence, the tail stays hidden. The bank imposes its own down case; the gap must be explained.
How to read it
The number of scenarios is not universal. Three coherent stories beat ten random shocks.
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What to learn next
Definitions are educational. They are not investment, credit or tax advice.