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Business Risk and Simulation Modelling in Practice: Using Excel, VBA and @RISK by Michael Rees

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CHAPTER 4 Full Integrated Risk Modelling: Decision-Support Benefits

In this chapter, we discuss the uses and benefits of full (integrated) risk models. We start with a discussion of their main characteristics, in particular highlighting their differences and benefits compared to risk register approaches, and then provide a detailed discussion of their benefits when compared to traditional static (non-risk) modelling approaches.

(We refer to traditional Excel modelling approaches as “static”. This is not intended to imply that the input values of such models cannot be changed; rather only to indicate that such approaches do not incorporate risk elements as a fundamental part of their conception”; some people prefer the term “deterministic”.)

4.1 Key Characteristics of Full Models

Full risk models are complete models that incorporate the effects of risks and uncertainties on all variables (e.g. prices, volume, revenues, costs, cash flow, tax, etc.); they are simply the counterpart (or extension) of traditional static models, but in which risk and uncertainty are incorporated.

Full risk models contrast with aggregate risk register approaches in several ways:

  • The effect on all model variables and on multiple metrics is captured.
  • The true nature of the risk is reflected, and time components and dependencies are incorporated.

These points are discussed in more detail below.

In many cases, knowledge of the effect of risks on a range of variables, metrics and performance indicators ...

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