Can I approach BBA Task 2 with the following plan?
1) Explain that the recommended performance metric used is present value of net profits as a percentage of initial revenues greater than 10%. And say this is required by BBA management. Not sure if we need to justify further on this?
2) Explain 2 risk measures, CTE and VaR. Further explain that CTE is better as it reflects all the poor scenarios that VaR does not.
3) Give a recommended starting price for initial recommendation with CDL. This price gives CTE(95) of 0%. Also explain on its VaR(95) = 8.5%.The mean is roughly 27.6% and % of < target profit is only 6%. So, gonna explain that this price is too conservative and not competitive enough. CDL might not make a deal as BBA bears too little risk.
4) Give another recommended price moving forward. This price gives CTE(90) = 0 and VaR(90) =8.9%. Explain what these 2 metrics mean. The % of not meeting target profit is 11%. Say that this price is more competitive and reasonable. BBA should make the deal with this price.
5) Last but not least, give another price if CDL still does not agree. This time, the price gives CTE(75) =0 but CTE (90) is showing negative. Explain that if the 10% poor scenarios do occur, BBA can make a loss. Therefore at this point, suggest not the proceed with the deal as BBA management is concerned with capital preservation.
As you can see, my approach of giving 3 different prices uses different risk metrics. Someone in forum has suggested that we should explain what these metrics mean and how to use them instead of just choosing one and ignore the rest. This approach also gives 3 point-estimates instead of giving a price range. Not sure if we must give a price range since the task does not say so? Anyone who MMRed got an opinion on this?
Thanks!
1) Explain that the recommended performance metric used is present value of net profits as a percentage of initial revenues greater than 10%. And say this is required by BBA management. Not sure if we need to justify further on this?
2) Explain 2 risk measures, CTE and VaR. Further explain that CTE is better as it reflects all the poor scenarios that VaR does not.
3) Give a recommended starting price for initial recommendation with CDL. This price gives CTE(95) of 0%. Also explain on its VaR(95) = 8.5%.The mean is roughly 27.6% and % of < target profit is only 6%. So, gonna explain that this price is too conservative and not competitive enough. CDL might not make a deal as BBA bears too little risk.
4) Give another recommended price moving forward. This price gives CTE(90) = 0 and VaR(90) =8.9%. Explain what these 2 metrics mean. The % of not meeting target profit is 11%. Say that this price is more competitive and reasonable. BBA should make the deal with this price.
5) Last but not least, give another price if CDL still does not agree. This time, the price gives CTE(75) =0 but CTE (90) is showing negative. Explain that if the 10% poor scenarios do occur, BBA can make a loss. Therefore at this point, suggest not the proceed with the deal as BBA management is concerned with capital preservation.
As you can see, my approach of giving 3 different prices uses different risk metrics. Someone in forum has suggested that we should explain what these metrics mean and how to use them instead of just choosing one and ignore the rest. This approach also gives 3 point-estimates instead of giving a price range. Not sure if we must give a price range since the task does not say so? Anyone who MMRed got an opinion on this?
Thanks!
BBA Task 2