RISK SOFTWARE

ESSAY Lic. En

RISK MANAGEMENT
ARTURO ALEJANDRO FLORES QUINONES

Negocios Internacionales
Dr Eduardo Trevio
INTRODUCTION

@RISK (pronounced at risk) performs risk analysis using Monte Carlo simulation to
show you many possible outcomes in your spreadsheet modeland tells you how likely
they are to occur. It mathematically and objectively computes and tracks many different
possible future scenarios, then tells you the probabilities and risks associated with each
different one. This means you can judge which risks taking and which ones to avoid,
allowing for the best decision making under uncertainty.
It is part of Palisade Corp, founded in 1984, from humble beginnings in their founders
basement, to being stablished as an internationally recognized industry leader focusing
in their core values: providing user-friendly analytical tools that enable decision-makers
in any industry to choose the beast approach.
In 1980, founder Sam McLafferty developed his own Monte Carlo simulator on an
Apple II with a built-in modeling language. This innovation sowed the seeds for the
Palisades genesis in 1984, right out of Sams basement. The first product was PRISM, a
stand-alone Monte Carlo tool for the IBM PC.
From thereon, Palisade continued to steadily grow, developing its first @RISK software
in 1987 for Lotus 1-2-3 for DOS. @RISK continues to be our flagship product today.
Throughout the decades, Palisade has never stopped innovating. And while our
technologies have changed with the times, our core values have stayed the same: to
provide world-class risk solutions and customer service, giving analysts and decision-
makers the tools to make the best decisions possible.
Montecarlo Simulation
Monte Carlo simulation is a computerized mathematical technique that allows people to
account for risk in quantitative analysis and decision making.
Monte Carlo simulation performs risk analysis by building models of possible results by
substituting a range of valuesa probability distributionfor any factor that has
inherent uncertainty. It then calculates results over and over, each time using a different
set of random values from the probability functions. Depending upon the number of
uncertainties and the ranges specified for them, a Monte Carlo simulation could involve
thousands or tens of thousands of recalculations before it is complete. Monte Carlo
simulation produces distributions of possible outcome values.
During a Monte Carlo simulation, values are sampled at random from the input
probability distributions. Each set of samples is called an iteration, and the resulting
outcome from that sample is recorded. Monte Carlo simulation does these hundreds or
thousands of times, and the result is a probability distribution of possible outcomes. In
this way, Monte Carlo simulation provides a much more comprehensive view of what
may happen. It tells you not only what could happen, but how likely it is to happen.
Monte Carlo simulation provides several advantages over deterministic, or single-point
estimate analysis:
Probabilistic Results. Results show not only what could happen, but how likely
each outcome is.
Graphical Results. Because of the data, a Monte Carlo simulation generates, its
easy to create graphs of different outcomes and their chances of occurrence.
This is important for communicating findings to other stakeholders.
Sensitivity Analysis. With just a few cases, deterministic analysis makes it
difficult to see which variables impact the outcome the most. In Monte Carlo
simulation, its easy to see which inputs had the biggest effect on bottom-line
results.
Scenario Analysis: In deterministic models, its very difficult to model different
combinations of values for different inputs to see the effects of truly different
scenarios. Using Monte Carlo simulation, analysts can see exactly which inputs
had which values together when certain outcomes occurred. This is invaluable
for pursuing further analysis.
Correlation of Inputs. In Monte Carlo simulation, its possible to model
interdependent relationships between input variables. Its important for accuracy
to represent how, in reality, when some factors go up, others go up or down
accordingly.
RISK SOFTWARE OVERVIEW
Running an analysis with @RISK involves three simple steps:
1. Set Up Your Model. Start by replacing uncertain values in your spreadsheet
with @RISK probability distribution functions, like Normal or Uniform, or
dozens of others. These @RISK functions simply represent a range of different
possible values that a cell could take instead of limiting it to just one case. Next,
select your outputsthe "bottom line" cells whose values interest you. This
could be potential profits, ROI, insurance claims payout, disease recovery rate,
or anything at all.

Input distributions may be correlated with one another, individually or in a time series.
Correlations are quickly defined in matrices that pop up over Excel, and a Correlated
Time Series can be added in a single click. A Correlated Time Series is created from a
multi-period range that contains a set of similar distributions in each time.
2. Run the Simulation. Click the Simulate button and watch. @RISK recalculates
your spreadsheet model thousands of times. Each time, @RISK samples random
values from the @RISK functions you entered, places them in your model, and
records the resulting outcome. Explain the process to others by running your
simulation in Demo Mode, with graphs and reports updating live as the
 simulation runs.

3. The result of a simulation is a look at a whole range of possible outcomes,

including the probabilities they will occur. Graph your results with histograms,
 Scatter Plots, cumulative curves, Box Plots, and more. Identify critical factors
with Tornado charts and sensitivity analysis. Paste results into Excel, Word, or
PowerPoint, or place them in the @RISK Library for other @RISK users. You
can even save results and charts right inside your Excel workbook.
@RISK provides a wide range of graphs for interpreting and presenting your
results to others. Histograms and cumulative curves show the probability of
different outcomes occurring.

@RISK provides you with sensitivity and scenario analyses to determine the
critical factors in your models. Use sensitivity analysis to rank the distribution
functions in your model according to the impact they have on your outputs.

Industry and applications

INDUSTRY SAMPLE APLICATION

RETIREMENT PLANNING
FINANCE CURRENCY VALUATION
SECURITIES REAL OPTIONS ANALYSIS
DISCOUNTED CASH FLOW ANALYSIS
 VALUE-AT-RISK
PORTFOLIO OPTIMIZATION
LOSS RESERVES ESTIMATION
INSURANCE PREMIUM PRICING
REINSURANCE

EXPLORATION AND PRODUCTION

OIL OIL RESERVES ESTIMATION
GAS CAPITAL PROJECT ESTIMATION
ENERGY
PRICING
REGULATION COMPLIANCE
MANUFACTURING QUALITY CONTROL
SIX SIGMA CUSTOMER SERVICE IMPROVEMENT
QUALITY ANALYSIS DMAIC
DFSS/DOE
LEAN SIX SIGMA
SIX SIGMA AND QUALITY ANALYSIS
MANUFACTURING NEW PRODUCT ANALYSIS
PRODUCTION SITING
PLANT SHUTDOWN
PRODUCT LIFE CYCLE ANALYSIS
NEW PRODUCT ANALYSIS
PHARMACEUTICALS R&D ESTIMATION
MEDICAL/HEALTHCARE DISEASE INFECTION ESTIMATION
ENDANGERED SPECIES PRESERVATION
ENVIRONMENT POLLUTION CLEANUP AND PROJECTIONS
RESOURCE ALLOCATION
WAR GAMES
GOVERNMENT AND DEFENSE WELFARE AND BUDGETARY PROJECTIONS
COST ESTIMATING
AEROSPACE TRANSPORTATION HIGHWAY PLANNING AND OPTIMIZATION
SUPPLY CHAIN DISTRIBUTION

CONCLUSION

Quantitative analysis techniques have gained a great deal of popularity with decision
makers and analysts in recent years. Unfortunately, many people have mistakenly
assumed that these techniques are magic black boxes that unequivocally specify the
correct decision. No technique, including simulation with @RISK, can make this
claim. These techniques are tools that can be used to help make good and enlightened
decisions. Like any tools, they can be used to good advantage by skilled practitioners, or
they can be used to create havoc in the hands of the unskilled. In the context of risk
analysis, quantitative tools should use to complement personal good personal judgment,
not replace it.
Finally, you should recognize that risk analysis cannot guarantee that the action you
choose to follow, even if skillfully chosen to match your personal preferences, is the
best action viewed from the perspective of hindsight. A perfect decision implies
perfect information, which you almost never have at the time you must make the
decision. However, by using @RISK to conduct a logical risk analysis, you can be
guaranteed that you have chosen the best strategy, given the available information when
you should make the decision.
The software is a great to control your risk, combining technology with knowledge to
would be the perfect mix to succeed with this, as it is not a magic box it gathers you
through all the possible outcomes your decision will have, you wont be Able to predict
the future but you will know all the possibilities
I conclude with the advice that if you got the money acquire it cause its very profitable
when using correctly, as you can control almost every aspect in your business, or
academic courses.

Bibliography

"Palisade Corporation: Maker of Risk & Decision Analysis Software using Monte
Carlo Simulation." Palisade. N.p., n.d. Web. 20 Mar. 2017.
Guide to using @RISK: risk analysis and simulation add-in for Microsoft Excel.
Newfield, NY: Palisade Corporation, 2012. Web.
<http://www.palisade.com/downloads/documentation/75/EN/RISK7_EN.pdf>.