How scenario & stress testing works

VaR compresses risk into one number under normal conditions. Scenario and stress testing ask a different question: what happens under specific severe moves? They reveal exposures a single statistic hides.

Define a grid of market shocks, price up and down, volatility up and down, curve shifts, and revalue the entire book under each combination. The result is a surface of outcomes that shows where the book is most exposed.

Stress testing pushes the severe corners: historical crises, hypothetical shocks, or regulator-defined scenarios. Because the book is revalued in full rather than approximated, non-linear positions (options, spreads) show their true behaviour under stress.

Like every other quant output, scenarios run against the same governed positions as valuation and VaR in the Risk module, so stress results are consistent with the live book.