Sensitivity

economic-dictionary

Sensitivity is the magnitude of the reaction of a certain variable to changes in another. That is, the change in a variable versus the variation in a factor that can impact its value, either positively or negatively.

That is, sensitivity refers to how much a certain variable changes when a change is registered in another related variable.

The purpose of analyzing sensitivity is to discover how much a certain factor impacts the value of a variable. For example, the sensitivity of a bond to the interest rate can be studied.

In this case, if the interest rate of a bond increases, a fall in the price of the instrument would be expected and vice versa.

It should be noted that the sensitivity term is usually related to the financial field. However, it also applies to other variables in other fields such as marketing or business planning.

Levels of sensitivity analysis

Sensitivity can be analyzed at two levels:

  • Macroeconomic: Refers to the reaction to variables of the economy as a whole, such as the interest rate, the inflation rate, economic growth, the level of employment, etc.
  • Microeconomic: It is the impact of changes in the variables of the market or the sector. For example, imagine that the price of the good or service offered by the company rises due to an increase in customer demand. This will have a positive impact on the company's revenue and possibly its share price.

Importance of sensitivity analysis

A sensitivity analysis is important in decision making. This, because it allows us to observe how changes in the key variables can impact on certain indicators, which has an impact on profitability or obtaining results.

The associated risks must also be taken into account. That is, what loss could we suffer from certain changes in the variables studied. These contingencies may be external or internal to the company (or issuing entity) and may have a low or high probability.

In any case, the ideal is to study the different possible scenarios. Diversification is also important here.

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