Answered by Breakout Group 3 Q3 An airline wishes to implement CFaR as an

Answered by breakout group 3 q3 an airline wishes to

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Answered by Breakout Group 3Q3An airline wishes to implement CFaR as an enterprise-wide risk measure.Answer the following:a)What sources of uncertainty would they need to model? Do they need to know the probability distribution of these drivers?b)How is the impact on the financial position of the company modelled?c)Should this company also consider using scenario and stress testing as well?
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Q3 c. answerYES.CFaR models including VaR and EC are based on complex statistical models and many assumptions calibrated on historic data. They can be misleading when making longer term forecasts, or when conditions change rapidly making the historic relationships unreliable measures of the future. They also only consider the current organisation’s risk exposures and not what new risks it may face in the longer term or if a change in strategy.Scenario and stress testing permits more qualitative judgement when considering the future. Black swan and other hypothetical scenarios can be considered even when not directly experienced by the organisation in the past, eg. Preparing for a pandemic, failure of oil well, crash of aircraft, war etc. Strategies can be tested using scenarios including anticipation of competitor actions.Currently, many organisations are having to plan using different scenarios as to when restrictions on their business may be lifted, which in turn depends on the spread of COVID-19 and subsequent political decisions. This cannot be predicted by statistical modelling done by organisations but rather using best and worst case scenarios of possible recoveries.
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McKinsey COVID-19 economic scenarios Q3 c. example Source: McKinsey & Co. COVID-19 Briefing Material, April 3, 2020. sk/our%20insights/covid%2019%20implications%20for%20business/covi d%2019%20march%2030/covid-19-facts-and-insights-april-3.ashx
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