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Usage of Stress Test 1-Capture the impact on a portfolio of exceptional but plausible large loss events |
2-Understand the risk profile of a business A stress test of a single customer - may reveal exposures which at individual business unit level to be insignificant, In aggregate, may have a large negative effect on the overall business. Stress test allows one to calculate the sensitivity of a portfolio to changes in risk factors, such as an upward shift in a yield curve. It is useful for setting limits and monitoring new products where no historical data are available. Triggers or "soft limits" - a breach of a predetermined level should initiate a discussion among senior management, risk managers and the affected business units to ensure that the relevant people are aware of the possibility of significant losses and to determine the appropriate actions, if any. 3-Evaluation of Business Risk Management needs to understand how the stress event impact the revenue sources over subsequent years Assists management in deciding whether this type of event is a threat to their underlying business and whether the capital supporting the business is appropriate. Example - testing the effect on the protfolio's profitability of a long period of low interest rates. |