Strengths of Earning Sensitivity Analysis Over the GAP Analysis (Research Paper Sample)
the task had 4 questions. the first question was explaining The strengths of earning sensitivity analysis over the GAP analysis. second question was defining financial ratios terms, for example, roa, roe. Third and fourth questions were explaining Importance of using financial safety as well as its weaknesses and size of the banking system and systemic risks respectively
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PRINCIPLES OF BANKING
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QUESTION 1
* The strengths of earning sensitivity analysis over the GAP analysis
In addition to credit risk, another form of risk that can be evaluated with the help of asset-liability management is interest rate risk (IRR) and liquidity risk. This type of risk is measured by conducting a gap analysis. The Internal Rate of Return (IRR) may be computed using an easy method demonstrating the difference between rate-sensitive assets and liabilities over a particular time frame.
The purpose of sensitivity analysis is to determine, based on a predetermined group of assumptions, how the effect of varying the value of an independent variable has on a particular dependent variable (Ross, 2010). In other words, sensitivity studies aim to investigate how the various forms of uncertainty included in a mathematical model influence the total amount of tension present in the model. This technique is used inside of boundaries that have been set in advance and are dependent on one or more input variables. Using sensitivity analysis is common practice in both the business sector and the academic field of economics. A what-if analysis is another name for this method, and it is utilized rather frequently by economists and other financial professionals.
The following are the advantages of earning sensitivity analysis over the GAP analysis:
When conducting sensitivity analysis, the independent and dependent variables are scrutinized closely (Ross, 2010). Their motion is investigated, as is the impact of the independent variable on the dependent one. One finds a cause-and-effect chain reaction when investigating the connection between the variables. This level of investigation is a possible, more precise outlook for the future.
Sensitivity analysis is helpful for pinpointing potential weak points by isolating the specific factors
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