the executives who make strategic decisions Careful calibration is required to ensure the accuracy of the scenarios and the correlations among business models. Scenario The scenario generator must meet the following criteria: Generate individual risks while keeping track of their dependencies with one another and with time (e.g., an increase in the price of gasoline might lead to less driving mileages of automobile policy holders, thus leading to fewer car accidents). Produce both normal and abnormal behavior of the risk factors (e.g., a 1% change in S&P index is normal; a 40% change is extreme). Simulate stochastic scenarios, meaning that scenarios are not the same every time you run the analysis. Assign mathematical models that best imitate the behaviors of the risk factors. Such models could be found in, though not exclusively, actuarial science, finance and economic disciplines. Track the incurred losses and the development of the losses, specifically the cash flows of the company's operation. This may help managers recognize the need to implement better asset liability management strategies. Interest rate generator The interest rate generator is the core fundamental of DFA. Many sophisticated interest rate models were created in the effort to best imitate the real world interest rate behavior. Although none of the existing models are perfect, they have their own advantages and disadvantages. The following is a simple interest rate model used in a publicly access DFA model. Cox, Ingersoll, and Ross (CIR) interest rate generator The CIR interest rate model characterizes the short-term interest rate as a mean-reverting stochastic projection. Although CIR was first used to project continuous changes in the interest rates, it is also acceptable to use it to project discrete changes from one time period to another. Below is the formula. where b = the long-run mean to which the interest rate reverts; the expected interest rate in the long run a = the speed of reversion of the interest rate to its long-run mean (e.g., a = 2 means the interest is expected to return to its long-term mean within half a year, and a = 1/5 means it would take 5 years). = the current short-term interest rate = the volatility of the interest rate process expressed as the standard deviation of historical or projected interest rate changes. The CIR model has two components: a deterministic and a stochastic part. The deterministic part will go in the reverse direction of