Project Description
This project presents a comprehensive analysis and model for revolving credit, which allows borrowers to withdraw funds multiple times within a credit limit and pay interest only on the withdrawn amount. This approach provides businesses and individuals with greater flexibility in cash flow management to meet short-term financial needs that are unpredictable.
Problem Formulation and Assumptions
The complexity of the problem was simplified through certain assumptions detailed in specific problem segments. The core issue revolves around managing and modeling the value of money over time, interest rate risks, and the withdrawal patterns of borrowers.
Figure 1. Graphing ideal interest rate and withdrawals
Figure 2. Simulating remainders
Solution Approach
Time Value of Money: the current value of withdrawals based on market interest rates and contract terms was calculated.
Interest Rate Risks: scenarios where market interest rates fluctuate and their impact on the bank's profitability was assessed.
Withdrawal Patterns: a model to predict customer withdrawal behavior using recursive calculation methods was developed.
Behavior Simulation: interest rate fluctuations and customer behavior using Decision Tree Regressor and an enhanced Random Forest Regressor algorithm was simulated.
Model Evaluation
The effectiveness of our model is assessed by comparing it against real-world scenarios and data. The model helps in predicting the benefits for both the bank and the borrower under various conditions, thus aiding in setting appropriate interest rates.
Applications
Our mathematical model can be utilized by financial institutions to price revolving credit contracts more accurately. It offers flexibility and can be adapted to various contexts beyond the initial assumptions and data used.