What are stylized scenarios used for?

Stylized scenarios are primarily used for simulating movements in significant interest rates or prices. This technique involves creating simplified models that represent complex variables to better understand potential future outcomes in financial markets. By focusing on key factors and their relationships, stylized scenarios help analysts explore the effects of different economic conditions, policies, or shocks on the financial system.

This approach is particularly valuable in stress testing, where financial institutions examine how extreme market events could impact their portfolios. By using stylized scenarios, analysts can assess robustness and resilience under various plausible future conditions, leading to better risk management and strategic planning.

The other options, while relevant to various aspects of financial analysis, do not capture the primary purpose of stylized scenarios as effectively as option C. Simulating random events, forecasting short-term gains, or predicting long-term stability may involve different methodologies and tools that do not focus specifically on the movements of interest rates or prices as central components.