If those ranked higher than you bomb out on the exam, you are fucked, that's pretty much the explanation (in very, very simple terms) 
This sums it up quite well.
Your cohort is judged based on how well they do on the exam. For example, if one school was scoring really well on the exam but really badly on SAC's, then VCAA will assume that that school must've had really hard SAC's and thus mark them up. If the converse happens, then VCAA will assume that your SAC's were too easy (or your teachers were too lenient) and thus your SAC scores will be marked down.
Your exam score never changes (in rare cases it can change, but I won't go into that).
well they dont really assume cause I doubt VCAA would go and check out each school, all will be done by technology..
Basically, If you rank 1, you get the highest exam score as your sac score. So eg. You are ranked 1, but do poorly on the exam (say C+), but the highest exam score from your school was A+. Then technically you should get A+ Sac scores.
Or, if you are ranked 5, Do really well on the exam (say A+) but the 5th ranked exam score from your school was really bad (say C+), then your SAC's scores will be C+ regardless that you got A+ on the exam. So your 3 scores may end up as C+, A+, A+ (assuming 2 exams, and both A+)
This is why its important to be rank 1 in a weak cohort, but not so important to rank 1 in a strong cohort