Short definition: Sensitivity analysis is a financial modeling technique used to assess how the outcome of a model changes when one or more input variables are adjusted.
Explanation: Sensitivity analysis helps to identify the key drivers of a model’s results and to assess the potential impact of different scenarios on the model’s outcome. It is often used in risk management and decision-making to evaluate the robustness of a model and to determine the most critical factors affecting its outcome.
Example: In a financial model for a new product launch, sensitivity analysis could be used to assess how changes in the product’s price, sales volume, or production costs would affect the projected profitability of the product.
Additional information (optional): Sensitivity analysis can be performed using various methods, such as one-way sensitivity analysis (changing one variable at a time), two-way sensitivity analysis (changing two variables simultaneously), or scenario analysis (evaluating the impact of multiple variables under different scenarios).