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Data-Driven Financial Management
Part 2
• Arcada University of Applied Sciences
Majid Einian
[Link]
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Rules
• Keep your Video on • Notes on the use of AI assistants:
• Keep your Mic off • Use them as an assistant not a replacement.
• You are always responsible for your material.
• Raise virtual hand in Teams for
• AI hallucination
questions
• Keep your muscles working!
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Session 3
SQL + Snowflake
WACC
Predictive Modelling
Day 1: Financial Reporting Digitalization & XBRL
16:30-17:30 17:45-18:45 19:00-20:00
• Course Overview • Team • XBRL
• Review on Presentations:
Financial • Jyväskylä
Reporting • Espoo
Frameworks & • Kuopio
how it affects
• Lahti
ratios and
valuaton
“Before data can be analysed, we must understand what rules generate it.”
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Day 2: Digital Data Chain & Predictive Modelling
16:30-17:30 17:45-18:45 19:00-20:00
• Team • The Modern • WACC
Presentations: Financial Data • Predictive
• Oulu Pipeline Modelling
• Tampere • Time-series
• Turku decomposition
• Vantaa for forecasting
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Day 3: Scenario Planning, Risk & Strategic Synthesis
16:30-17:30 17:45-18:45 19:00-20:00
• Scenario & • Identifying • Project
Sensitivity and Managing description &
Analysis Financial Risk wrap up
• What-if tools • FX
in Excel for • Interest rate
NPV models • Hedging
Instruments
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Scenario & Sensitivity Analysis
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Why Scenario Analysis Matters
• Future cash flows are uncertain Scenario Forecasts
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• Forecasts are only one possible
outcome
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• Scenarios help capture the range of
possibilities 15
• Supports strategic decisions under
uncertainty 10
• Core tool for CFOs, strategy teams, and
financial analysts 5
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Best Case Base Case Worst Case
A single forecast assumes that we know the future with precision.
In reality, no company can reliably predict demand, margins, interest rates, or input
costs without margin of error.
Scenario analysis explicitly acknowledges uncertainty.
Instead of one future, you model several plausible futures and see how robust your
decisions are across them.
This is the foundation for capital budgeting, strategic planning, and risk management.
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Types of Scenarios
• Base Case: most likely operating
conditions
• Best Case: favorable upside (higher
revenue, lower costs)
• Worst Case: downside risks (lower
sales, cost pressures)
• Strategic Cases: alternative business
strategies
• Macro Cases: driven by economy, FX,
interest rates
Base, best, and worst cases are the most widely used scenario types.
They provide a minimal structure for thinking about uncertainty.
Strategic cases explore how different business decisions, entering a new market or
launching a new product, alter outcomes.
Macro cases account for external shocks.
A strong scenario model can incorporate several of these dimensions at once.
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Example Cash Flow Scenario
• Base Case:
• Revenue growth: 3%
• Operating margin: 15%
• Discount rate: 8%
• Best Case:
• Growth: 6%
• Margin: 18%
• Discount rate: 7%
• Worst Case:
• Growth: 0%
• Margin: 10%
• Discount rate: 9%
This slide shows how multiple assumptions shift the cash flows and discount rate,
producing different NPVs. Even small differences in growth and margin can
significantly change the project’s attractiveness. Analysts typically model 5–10 years
of cash flows and discount each scenario to arrive at scenario-specific valuations.
This provides a structured way to discuss risk rather than relying solely on intuition.
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Linking Scenarios to Discount Rates
• Discount rate reflects risk
• Riskier scenarios → higher r
• Stable scenarios → lower r
• Ties scenario planning to capital
structure and WACC
• Valuation changes via cash flows and r
Scenario analysis is not limited to operational inputs.
The discount rate is itself part of the scenario.
If the macro environment worsens, capital becomes more expensive: interest rates
increase, risk premiums expand, and the discount rate rises.
Expressing this explicitly enables students to produce realistic valuations that
incorporate both operational and financial uncertainty
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Scenario Analysis in Excel
• Excel in Action!
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Sensitivity Analysis: What It Is
• Examines how changes in one variable
at a time affect outcomes
• Shows which assumptions the model is
most sensitive to
• Helps prioritize research and
management attention
• Complements, not replaces, scenario
analysis
Sensitivity analysis isolates variables and measures their impact on NPV or profit.
While scenarios vary many assumptions simultaneously, sensitivity analysis varies
inputs individually.
The shape of the tornado diagram reveals which assumptions drive the most value.
In practice, this has implications for risk mitigation: if margin volatility drives most of
the NPV variation, then improving pricing strategy or reducing cost uncertainty should
be a priority.
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Common Sensitivities in Financial Models
• Revenue growth
• Operating margin
• Discount rate (WACC)
• Capital expenditure
• Working capital assumptions
• Terminal value growth rate
Many financial models use a standard set of sensitivities.
The choice of variables depends on the project’s characteristics.
If the business is capital-intensive, Capex sensitivity may dominate. For subscription
businesses, churn rate becomes critical. The goal is to identify where uncertainty
could materially affect your valuation and to focus managerial attention there.
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Sensitivity Analysis in Excel
• Excel in Action
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Why These Tools Matter for CFOs
• Better decisions under uncertainty
• Clear communication with management Forecasting
and investors
• Support for capital budgeting and
strategic planning Capital
Risk
Allocation
• Identifying key value drivers and risks
• Enhancing credibility of forecasts
Strategy Decisions
In real organizations, financial forecasts must support strategic decisions. CFOs rely
on scenario and sensitivity analysis to avoid blind spots and to produce robust plans
that withstand uncertainty. These tools help explain to boards and investors how risks
influence outcomes and demonstrate that the company can navigate different
environments.
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Identifying and Managing Financial Risk
Laws (2018), Ch. 2: Risk vs Return & Ch. 7: FX Risk
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What is Risk?
• Risk = variability in expected outcomes
• Risk is not the bad outcome (some books
get it wrong!)
• Uncertainty affects cash flows and
valuation
• Sources of risk: market, operational,
strategic, macroeconomic
• Financial decisions must account for
possible deviations from forecasts
• Risk-return trade-off: higher risk →
higher required return
Risk represents the possibility that actual outcomes deviate from expectations.
(The Psychology of Money, by Morgan Housel, rated 4.29/5 on Goodreads by 304,018
ratings!, uses the word “risk” in a totally wrong sense!)
Firms face risk from both internal and external sources.
From a financial perspective, risk directly influences the required return on
investments: investors demand compensation for uncertainty.
Understanding risk is the foundation for scenario analysis, sensitivity testing, and
discount rate adjustments.
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Types of Financial Risk
• Market Risk: price and macroeconomic
fluctuations
Market Risk
• Credit Risk: counterparty fails to pay
• Liquidity Risk: inability to convert Interest
Credit Risk
assets quickly Rate Risk
• Operational Risk: internal processes,
Financial
systems, people Risk
• FX Risk: impact of exchange rate
movements FX Risk
Liquidity
Risk
• Interest Rate Risk: changing borrowing
costs or asset yields
Operational
Risk
Businesses face many categories of risk, and financial analysts must understand the
nature and drivers of each. Market risk and credit risk originate from external
economic forces. Operational risks come from within the organization. FX and interest
rate risk are particularly important in valuation and budgeting — changes in exchange
rates and interest rates affect cash flows, competitiveness, and discount rates.
References:
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FX Risk: Why It Matters
• Exchange rate movements affect revenue, costs, and profits
• Exposure depends on currency mix of transactions
• Firms with international operations are always exposed
• Volatility in FX can significantly change project outcomes
EUR / USD
Even companies that do not export or import may face FX effects indirectly (e.g.,
competitors, suppliers, macro conditions).
FX volatility is often sharp and unpredictable.
Understanding FX risk is essential when analyzing cash flows in multiple currencies or
when evaluating international investments.
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Types of FX Exposure
• Risk associated with future receivables
Transaction and/or payables in foreign currency.
• Risk associated with changing
Economic competitiveness as exchange rates change.
• Risk associated with assets and/or liabilities
Translation denominated in foreign currency.
FX exposure is not a single concept.
Transaction exposure directly affects cash flows (e.g., receiving USD payments).
Economic exposure is the broadest: how currency movements change competitive
position, pricing power, and long-term profitability.
Translation exposure arises from converting foreign subsidiary results into the parent
company’s reporting currency.
All three are relevant for strategic financial planning.
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FX Risk: Transaction Exposure
• Exposure from future cash flows in foreign currencies
• Affects: sales, purchases, interest payments, royalties
• Occurs between contract date and settlement date
• Gains/losses recognized in profit or loss
• Key driver of short-term earnings volatility
FX
Contract Settlement Gain/Loss
Movement
Transaction exposure arises whenever a company commits to a cash flow in a foreign
currency.
Between the time of a sales or purchase contract and the actual payment, exchange
rates can change.
These FX movements create gains or losses when converting the payment into the
home currency.
This exposure directly affects the income statement and is often the most actively
managed type of FX risk because it impacts short-term profitability.
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FX Risk: Translation Exposure
• Affects multinational companies with foreign subsidiaries
• Results from converting foreign financial statements to home currency
• Impacts balance sheet and equity, not cash flows
• Mostly accounting effect, but signals underlying risk
• Depends on consolidation rules and chosen exchange rate method
Translation exposure occurs when the financial statements of foreign subsidiaries
must be converted into the parent company’s reporting currency for consolidation.
Although translation exposure does not create immediate cash flow effects, it can
influence reported equity, financial ratios, and investor perceptions.
For firms with significant international operations, translation volatility may affect
stock price and creditworthiness.
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FX Risk: Economic Exposure
• Long-term competitive impact of currency movements
• Affects pricing, cost structure, and global competitiveness
• Hardest to measure, most strategically important
• Example: home currency appreciation → exports become less competitive
• Evaluated over multi-year horizons
Economic exposure captures the broad, long-term effects of currency movements on
a firm’s future cash flows, competitiveness, and strategy.
Unlike transaction and translation exposures, economic exposure is not tied to
specific contracts.
Instead, it reflects how exchange rates shift demand, costs, and market position.
Because it unfolds over years, firms must integrate it into strategic planning, pricing
decisions, and location choices.
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Discussion: FX Exposure in a Bank
• A bank holds
• Assets in foreign currency (e.g. USD bonds)
• Liabilities in foreign currency (e.g. foreign
investor deposits)
• Question:What type(s) of FX exposure is
this bank facing?
• Consider how exchange rate changes
might affect:
• Balance sheet values
• Cash flows
• Overall profitability
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FX Exposure in a Bank
• Transaction exposure: Cash flow risk from FX-denominated assets or liabilities.
• Translation exposure: Accounting impact on balance sheet when reporting in
domestic currency.
• Economic exposure: Longer-term profitability affected by FX rate movements.
Banks with high FX liabilities are particularly sensitive to domestic currency
depreciation.
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Discussion: Foreign investment
• Flow of Investments around the world
• FDI: Foreign Direct Investment
• FPI: Foreign Portfolio Investment
• ECB: External Commercial Borrowing
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Foreign investment
Investment Type FX Sensitivity Key Effect
Operational investment → FX risk mostly through repatriated
FDI (Foreign Direct Investment) Low/medium profits, not initial capital. Long-term, often hedged via natural
currency flows.
Equity or bonds → value fluctuates directly with exchange rates,
FPI (Foreign Portfolio Investment) High can cause balance sheet gains/losses. Short-term capital flows
→ highly FX-sensitive.
Debt in foreign currency → FX depreciation increases domestic
ECB (External Commercial Borrowing) Very High currency repayment amount. Can threaten solvency or liquidity if
unhedged.
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Hedging Instruments
Laws (2018), Ch. 8: Futures & Ch. 9: Options, also Ch 4. Bonds
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Hedging FX: Why Firms Hedge
• Reduce earnings volatility
• Improve planning certainty
• Protect margins
• Align cash flows with currency of expenses
• Support debt covenants and investor expectations.
Hedging aims to reduce the volatility caused by FX movements rather than eliminate
risk entirely.
Volatile earnings can weaken investor confidence, complicate budgeting, and strain
debt covenants. Hedging tools allow firms to lock in a predictable rate or offset
exposures so that operational decisions drive financial outcomes, not currency
fluctuations.
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Hedging Tools: Forwards & Futures
Forward Contracts
• Customized between firm and bank
• Fixed exchange rate for a future date
• No upfront cost
• Most common corporate hedge
Futures Contracts
• Standardized, exchange-traded
• Marked to market daily
• More liquid, but less tailored
Forward contracts and futures are foundational hedging tools.
Forwards are tailored to the firm’s specific needs and therefore widely used in
corporate finance.
Futures are standardized and exchange-traded, which enhances liquidity but limits
customization.
Both tools allow firms to lock in exchange rates and eliminate uncertainty around
future payments.
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Hedging Tools: Options
• Provides right, not obligation, to buy or
sell currency
• Protects against adverse movements
while keeping upside
• Useful when exposure is uncertain
• More expensive than forwards due to
premium
Options provide asymmetric protection: firms pay a premium today to secure the right
to transact at a specific exchange rate. This is valuable when cash flow timing or
amount is uncertain, or when management wants to preserve upside potential if the
currency moves favorably. Higher cost is the trade-off for flexibility.
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Interest Rate Risk: What It Is
• Risk that interest rates change
unexpectedly
• Affects borrowing costs and investment
returns
• Impacts bond values, leases, loans,
discount rates
• Particularly important when firms rely on
variable-rate debt
Interest rate risk affects both sides of the balance sheet.
Rising rates increase costs for borrowers with variable-rate debt.
Falling rates reduce investment income for firms holding short-term cash or bonds.
Because interest rates also influence valuation through the discount rate, interest rate
movements can affect decision-making even for firms without debt.
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Duration: Measuring Interest Rate Sensitivity
• Duration = sensitivity of bond value to interest rate changes
• See Law 2018, Ch 4.6 and 4.7
• Higher duration → more price movement for same rate change
• Long-term projects analogous: longer cash flows → more valuation impact
• Key for understanding how rates affect NPV
Duration summarizes how responsive the value of cash flows is to interest rate
changes.
A high-duration asset loses more value when rates rise.
This concept extends beyond bonds: long-horizon investment projects behave like
long-duration assets, so changes in discount rates can significantly shift their
valuations.
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Interest Rate Hedging Tools
• Interest Rate Swaps: exchange fixed vs
floating payments
• Futures on interest rates: lock in future
borrowing cost
• Caps and floors: limit
maximum/minimum interest rates
• Align interest rate risk with firm’s risk
appetite
Firms hedge interest rate risk to stabilize financing costs. Swaps convert variable-rate
debt into fixed-rate obligations or vice versa. Caps and floors create protection against
unexpected extremes. Futures allow firms to pre-set borrowing costs. The right mix
depends on risk tolerance, cost considerations, and market conditions.
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Integrating Risk into NPV
• Combine scenarios with FX and interest rate assumptions
• Adjust discount rate to reflect risk (WACC)
• Stress-test key drivers
• Project value varies across different risk conditions
NPV is not a fixed number, it changes as risk conditions change.
By integrating FX, interest rate, and operational uncertainties, the valuation becomes
more realistic. Adjusting the discount rate based on risk profiles further refines the
analysis. This is the core of modern capital budgeting and strategic finance.
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Bringing It All Together
• Forecast → Scenario → Sensitivity → Risk
• FX and interest rate exposures influence cash flows
• Discount rate reflects risk profile
• Valuation connects operational and financial uncertainty
Data Forecast Scenarios Risk Valuation Decision
Today’s session integrates concepts from financial modelling, macroeconomics,
corporate finance, and risk management.
A robust financial decision-making framework recognizes uncertainties in both
operations and financial markets.
By combining scenario analysis, sensitivity analysis, and risk-aware valuation, firms
can make decisions that remain valid under a wide range of conditions.
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Final Project
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Final Project Guidance
• Form your team
• Select company
• Select one financial measure
• Gather data
• Imagine the selected company is your competitor
• Write a short analysis report
• Deadlines:
• Executive report (2-3 page): Dec 5
• Peer-review report: (1 page): Dec 11
• Self-refection report: (½ page): Dec 17
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Wrap Up
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Course Wrap-Up
• You now know how to:
• Retrieve financial data
• Prepare and clean datasets
• Analyse financial statements
• Build forecasts
• Apply WACC
• Conduct scenario & sensitivity analysis
• Assess FX and interest rate risk
• Perform valuation under uncertainty
• You are ready to complete the final project and do more!
This course has taken you from data extraction to valuation under uncertainty.
You have learned both traditional financial analysis tools and modern data-driven
techniques.
These skills are directly applicable to real business environments where decisions
must incorporate risk, incomplete information, and rapidly changing conditions.
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Thank You & Questions
• Questions about:
• Project
• Scenario modelling
• Risk analysis
• Valuation
• Follow-up materials available on
itslearning
• Good luck with your final submission!
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