economics, Mathematics

Assignment Help:
A mortgage lender seeks to maximize the expected value of its portfolio. The portfolio, of course, is the
sum of all of the mortgages in it, so no generality is lost by examining the case of one loan:
E[port] = (1-p).B +p.(V-L)
where:
_ E[port] is the expected value of the portfolio
_ p is the probability of foreclosure
_ B is the principal balance
_ V is the sale price at foreclosure
_ L is the legal fees incurred by foreclosure
Assume that the borrower’s probability of foreclosure is an increasing function of his/her ”balance-to value ratio” (i.e. B/V):
P ? p (B/V) P’>0
In other words, borrowers who are deeper underwater are more likely to enter the foreclosure process. In such cases, reducing principal balances would reduce foreclosure-related losses (by reducing the probability of foreclosure). On the other hand, principal balance reductions are a direct loss for the lender.
1. Derive the marginal benefit of reducing principal balances.
2. Derive the marginal cost of reducing principal balances.
3. What is the necessary condition for maximizing E[port] with respect to the principal balance?
4. What is the sufficient condition for maximizing E[port]?
5. How does the marginal benefit curve shift in response to an increase in L?
6. How does the marginal cost curve shift in response to an increase in L?
7. How does the optimal principal balance change when L increases?

Related Discussions:- economics

Trigonometric Identities, How to sovle or prove whether an equation is a id...

How to sovle or prove whether an equation is a identity?

Quardrilatrel, construct aquadrilaterl PQRSin which pq=3.5cm qr=6.5cm ,p=60...

construct aquadrilaterl PQRSin which pq=3.5cm qr=6.5cm ,p=60 ,q=105 ,s=75

Linear programming , Use the simplex method to solve the following LP Probl...

Use the simplex method to solve the following LP Problem. Max Z = 107x1+x2+2x3 Subject to 14x1+x2-6x3+3x4=7 16x1+x2-6x3 3x1-x2-x3 x1,x2,x3,x4 >=0

find an explicit formula, (a) The generating function G(z) for a sequence ...

(a) The generating function G(z) for a sequence g n is given by G(z) = 1 - 2z/(1 + 3z)3 Give an explicit formula for g n . (b) For the sequence gn in the previous part co

Word Problem, a local pizza store offers medium two-topping pizzas delivere...

a local pizza store offers medium two-topping pizzas delivered for $6.00 per pizza plus a $1.50 delivery charge per order. on weekends, the store runs a game day special: if six or

Shares and dividends, at what price a 6.25%rs 100 share be quoted when the ...

at what price a 6.25%rs 100 share be quoted when the money is worth 5%

Positive real exponents, Simplify following and write the answers with only...

Simplify following and write the answers with only positive exponents.  (a) ( x 8.2 y -0.26 z 2 ) 0.5  (b)  (x 3 y -4.1   / x -2.7 ) -3 Solution  (a) (x 8.2

Derive a boolean first-order query, Consider a database whose universe is a...

Consider a database whose universe is a finite set of vertices V and whose unique relation .E is binary and encodes the edges of an undirected (resp., directed) graph G: (V, E). Ea

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd