Business and Personal Finance Dictionary

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• STRESS TEST
  
  Definition: A test of a model for pricing or risk management, using an extreme scenario or family of scenarios. Example: For example, you might price your portfolio, using market conditions at the time of the crash of 1987, or assuming a three-standard-deviation move in prices, or a 100-year move in the forward curve. Application: You can use a stress test to find out a model’s breaking point. Pricing: As you move a European barrier call option’s barrier away from the spot price, the option’s value approaches that of an ordinary European call. Risk Management: Stress-testing of VaR systems is commonplace.
  
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