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How can you test the robustness of your financial simulations?

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Financial simulations are powerful tools for business architects to evaluate different scenarios and plan for the future. However, they are also subject to uncertainty, assumptions, and errors that can affect their validity and reliability. How can you test the robustness of your financial simulations and ensure that they are not misleading or inaccurate? Here are some tips to help you.

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1 Define your objectives and scope

Before you start your simulation, you need to have a clear idea of what you want to achieve and what are the boundaries and constraints of your model. What are the key questions you want to answer, the variables you want to explore, and the outcomes you want to measure? What are the sources and quality of your data, the assumptions and parameters of your model, and the limitations and risks of your simulation? By defining your objectives and scope, you can focus your simulation on the most relevant and feasible aspects and avoid unnecessary complexity or ambiguity.

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Deobojyoti Kumar

Economic research|Policy researchand Advocacy|ITFA
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That's a great to have discuss on the Financial simulation . In terms of the complexity of the model the modeller need to focus on the construction on the fundamental level of the human needs. If we look the current trend of Financial world the volatility factor remains a concern that's not a major factor of discussion rather to concentrate on the how to build a model on the micro-factors on which the volatility depends .

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2 Use multiple methods and techniques

There is no one-size-fits-all approach to financial simulation. Depending on your objectives and scope, you may need to use different methods and techniques to capture the dynamics and uncertainty of your system. For example, you may use deterministic, stochastic, or hybrid models, discrete or continuous time steps, linear or nonlinear relationships, and so on. You may also use different tools and software to implement your simulation, such as spreadsheets, programming languages, or specialized platforms. By using multiple methods and techniques, you can compare and contrast the results and check for consistency and validity.

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3 Perform sensitivity and scenario analysis

One of the main challenges of financial simulation is to account for the uncertainty and variability of the inputs and outputs. How do your results change when you change the values or distributions of your variables, parameters, or assumptions? How do your results differ when you consider different scenarios or cases that reflect different conditions or events? By performing sensitivity and scenario analysis, you can test the robustness of your simulation and identify the key drivers and uncertainties that affect your outcomes. You can also evaluate the impact and probability of different scenarios and plan accordingly.

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4 Validate and verify your simulation

Another important step to test the robustness of your simulation is to validate and verify your model and results. Validation means checking whether your simulation matches the reality or the system you are trying to simulate. Verification means checking whether your simulation is free of errors or bugs in the logic, code, or data. You can use various methods to validate and verify your simulation, such as historical data, expert opinions, empirical tests, logical checks, or peer reviews. By validating and verifying your simulation, you can increase the confidence and credibility of your results and recommendations.

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Gauri S.

Credit Analyst @ Apollo Global Management
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While undertaking any kind of model building, you've to take into account that each model is unique. Sure, there may be a standard template already in place to get you started - but just like any two companies are never 100% the same (even if they're engaged in the same business) each model or simulation thus derived from them is also unique. Every model or simulation should be constructed keeping in mind the unique nature of the subject on which it is being simulated.

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5 Communicate and document your simulation

Finally, you need to communicate and document your simulation clearly and transparently. How do you present and explain your results and findings to your stakeholders, clients, or decision-makers? How do you report and document your simulation process, methods, data, assumptions, limitations, and risks? How do you handle feedback, questions, or criticisms of your simulation? By communicating and documenting your simulation effectively, you can demonstrate the robustness of your simulation and facilitate its understanding, interpretation, and application.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you test the robustness of your financial simulations?

1

2

3

4

5

6

1 Define your objectives and scope

2 Use multiple methods and techniques

3 Perform sensitivity and scenario analysis

4 Validate and verify your simulation

5 Communicate and document your simulation

6 Here’s what else to consider

Business Architecture

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How can you test the robustness of your financial simulations?

1

2

3

4

5

6

1 Define your objectives and scope

2 Use multiple methods and techniques

3 Perform sensitivity and scenario analysis

4 Validate and verify your simulation

5 Communicate and document your simulation

6 Here’s what else to consider

Business Architecture

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