Question

What does you mean by sensitivity analysis of risk?

Answer 1

Risk’ – a four letter word that has gained increased prominence since the financial crisis hit. More appropriately the lack of risk management is being blamed for helping to deepen the financial crisis. Companies are now focusing on the various types of risk management techniques available to them and the list is extensive: Liquidity, collateral, counterparty, market, etc. As part of their risk management policy, companies need to decide how they are going to determine their portfolio’s exposure to the various types of risk. What happens if interest rates go up? What if we have another crash – what will be the impact on my company? The true cost of risk management comes in not having a properly defined risk management process. The consequence of having an ill-conceived or inadequate process means that your organisation has no visibility into how even the simplest changes will impact the bottom line. And using a method that is insufficient is detrimental. How do you decide where to begin? This article will examine sensitivity analysis methods in more detail and discuss some of issues you need to think about when incorporating Value-at-Risk (VaR) into your risk management process.

Answer 2

Answer:

Sensitivity analysis is the quantitative risk assessment of how changes in a specific model variable impacts the output of the model.

For example, sensitivity analysis allows you to identify which task's duration with uncertainty has the strongest correlation with the finish time of the project.