Differentiate between Historical and Hypothetical Stress Testing Scenarios.
Historical stress testing uses actual past market events (e.g. the 2008 crisis or a specific crypto crash) to re-evaluate the portfolio's losses under those conditions. Hypothetical stress testing creates plausible but not necessarily observed extreme scenarios (e.g. a 50% drop in Bitcoin price combined with a 30% increase in volatility) to test the margin model's resilience to unprecedented events.
Glossar
Extreme Scenarios
Simulation ⎊ Extreme scenarios are hypothetical market events designed to simulate severe financial stress and test the resilience of central counterparties (CCPs) and clearing members.
Historical Stress Testing
Scenario ⎊ Historical stress testing, within the context of cryptocurrency, options trading, and financial derivatives, involves the retrospective application of simulated adverse market conditions to assess the resilience of portfolios, trading strategies, or underlying assets.
Stress Testing
Exposure ⎊ The core of stress testing within cryptocurrency derivatives, options trading, and financial derivatives revolves around quantifying potential losses under extreme, yet plausible, market conditions.
Testing
Validation ⎊ Testing within cryptocurrency, options trading, and financial derivatives serves as a critical process for confirming the accuracy and reliability of models, algorithms, and trading systems before deployment.
Hypothetical Stress Testing
Scenario ⎊ Hypothetical stress testing, within the context of cryptocurrency derivatives, options trading, and broader financial derivatives, represents a quantitative risk management technique designed to evaluate portfolio or system resilience under extreme, yet plausible, market conditions.