BA-13 · LESSON 08

Scenario modelling

KEY DEFINITIONS

Terms used in this lesson

Spread: The gap between executable buy and sell prices in a market.

Forecasts must expose assumptions, ranges, sensitivities, and version history instead of presenting a single projected number as truth.

65 min Difficulty 3/5 Not started

VISUAL MODEL

See the whole mechanism before going step by step

Use the diagrams to orient yourself. Then the guided explanation below teaches every part in depth.

4 explanatory views

CONCEPT-SPECIFIC MAP · market ledgerEvery financial return is a ledger of positions, cash flows, and riskSelect any state to inspect its exact role.

RELATIONSHIP MAPCompeting paths and resolution

01
POSITIONAsset and liability
Start by naming the exact long, short, debt, collateral, or reserve position.
02
PRICE PATHEntry, exit, mark
Price changes affect each leg and can trigger margin or liquidation boundaries.
03
CASH FLOWSScenario modelling
The Scenario modelling model includes fees, funding, spreads, slippage, and timing.
04
RECONCILEassets = claims + equity
Every successor state must conserve the ledger under the chosen units.
05
STRESSChanged assumption
A useful model exposes what fails when liquidity, price, cost, or timing is adverse.

Rule shown: Claims about yield or profit are calculations from versioned assumptions, never protocol facts.

STAGE 1 OF 5POSITION: Asset and liability

Start by naming the exact long, short, debt, collateral, or reserve position.

Governing relationship: Claims about yield or profit are calculations from versioned assumptions, never protocol facts. Complete path: 1. POSITION, Asset and liability. Start by naming the exact long, short, debt, collateral, or reserve position. 2. PRICE PATH, Entry, exit, mark. Price changes affect each leg and can trigger margin or liquidation boundaries. 3. CASH FLOWS, Scenario modelling. The Scenario modelling model includes fees, funding, spreads, slippage, and timing. 4. RECONCILE, assets = claims + equity. Every successor state must conserve the ledger under the chosen units. 5. STRESS, Changed assumption. A useful model exposes what fails when liquidity, price, cost, or timing is adverse.

1. State transitionWhat exists, what changes, and what results

BEFORE

Revenue equals monthly volume times fee rate. Base volume $10m at 0.5 percent; downside $4m at 0.4 percent; stress $1m at 0.3 percent.

MECHANISM

State units, dates, cash-flow timing, balance-sheet relationships, and what result such as revenue, profit, liquidity, or return actually means.

AFTER

The range reveals dependency on volume and fee assumptions and exposes the loss threshold.

Text equivalent: Starting from Revenue equals monthly volume times fee rate. Base volume $10m at 0.5 percent; downside $4m at 0.4 percent; stress $1m at 0.3 percent. The mechanism begins when State units, dates, cash-flow timing, balance-sheet relationships, and what result such as revenue, profit, liquidity, or return actually means. The resulting lesson is The range reveals dependency on volume and fee assumptions and exposes the loss threshold.

2. Mechanism pathSelect a stage to inspect its job

STAGE 1 OF 5

Define the output formula

State units, dates, cash-flow timing, balance-sheet relationships, and what result such as revenue, profit, liquidity, or return actually means.

Complete path: 1. Define the output formula: State units, dates, cash-flow timing, balance-sheet relationships, and what result such as revenue, profit, liquidity, or return actually means. 2. Separate observed and assumed inputs: Mark market data, contractual values, protocol parameters, management estimates, and unknowns with source and capture date. 3. Build coherent cases: Base, downside, and stress cases combine compatible price, volume, spread, fee, default, funding, and cost assumptions. 4. Run sensitivities: Vary one major driver through a range to reveal which assumptions dominate the output and where thresholds break. 5. Communicate ranges and survival: Report outputs, missing inputs, liquidity minima, failure triggers, and model version rather than one precise headline.

3. Rule and failure boundaryWhat accepts the result and where it can stop

ACCEPTED PATH

Every forecast input carries a case identity, classification, source, capture date, unit, and version; the engine rejects incoherent scenario ordering and recomputes the exact model and sensitivity delta.

CHANGED CONDITION

Unknown evidence withholds the output, identical named scenarios or all-zero placeholders fail coherence, and changing more than one input invalidates a one-variable sensitivity claim.

Important distinction: A detailed spreadsheet makes a forecast objective. Formulas can be precise while assumptions remain uncertain, biased, correlated, or incomplete. Transparency and stress testing matter more than decimal places.

Text equivalent: The accepted path is enforced by Every forecast input carries a case identity, classification, source, capture date, unit, and version; the engine rejects incoherent scenario ordering and recomputes the exact model and sensitivity delta. If the required condition changes, Unknown evidence withholds the output, identical named scenarios or all-zero placeholders fail coherence, and changing more than one input invalidates a one-variable sensitivity claim.

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Learn the idea

Scenario modelling compares outcomes under explicit assumptions rather than predicting one future. A base case is a central planning case, a downside case changes plausible adverse variables, and a stress case tests survival under severe combinations. Sensitivity changes one input at a time; a scenario changes a coherent set. Version history records when and why assumptions changed.

GUIDED EXPLANATION1/5 ideas inspected

Define the output formula

State units, dates, cash-flow timing, balance-sheet relationships, and what result such as revenue, profit, liquidity, or return actually means.

The worked example follows the explanation

Inspect every idea above to open it.

Important distinction“A detailed spreadsheet makes a forecast objective.”

Formulas can be precise while assumptions remain uncertain, biased, correlated, or incomplete. Transparency and stress testing matter more than decimal places.

FINISH LEARNING FIRST

The questions unlock after every required learning activity

Inspect every guided idea, open the worked example, rebuild its mechanism, and complete the deterministic lesson tool. Your progress is saved automatically.