Simulation for risk evaluation is the process to evaluate corporate risk in synthetic environment. Here, I have used the term synthetic environment. It is not real but it is almost same business environment for checking corporate profitability with associate risk. Virtual simulation is more famous finance term for risk evaluation. Before taking any financial decision, risk evaluation is must under artificial conditions.
Suppose, we have to construct a dam, this project will be simulated by computer engineering and estimated the risk if we construct it in real conditions. After this, solution is provided for minimizing this risk.
Some of questions relating to simulation for risk evaluation may be the issue of discussion :
Question : 1. Who can take benefits from simulation for risk evaluation?
Answer : Even whole company can take benefits from this technique of risk evaluation but risk manager and financial analysts must know this because they are responsible for managing the risk of corporate big projects. So, both risk manager and financial analysts can take benefits from it.
Question : 2. How to simulate for risk evaluation?
Answer : Like any other technique of risk evaluation, simulation for risk evaluation need good planning and other different steps which should be taken by risk manager. We are explaining it in following way:
1st Step : Risk Assessment and Identify the Risk
You would listen the term of tax assessment. Tax assessment means to collect different incomes and calculate tax on it. Like tax assessment, we have to collect data relating to different risk of corporate different projects. Risk may be market, political, business, legal, liquidity or solvency. A assessment report should be made in which we we can assess their level of risk if we do specific act. For assessing the risk of big investment projects, we can take the help of project's risk computation techniques.
2nd Step : Develop Solution :
A) NPV Solution
B) Credit Rating Model
C) Analysis of Borrower's Financial Statements
After calculating solvency ratios, we can know whether our borrower will in a position to pay us on the time or not.
D) Trend Analysis
E) Value at Risk
In this part of step we calculate maximum potential losses for an expected investment. This is used for evaluation of share marketing investment's risk.
3rd Step : Safety Measures
It is better that with simulation, we should develop new way to safeguard from risk. It is general saying, " Good defense is just as useful as good offense." So, safety measures can only develop after continue monitoring the progress of project completion.
Related : Financial Evaluation