Optimal Equity Recovery for a Cooperative Financial Institution
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A model is developed that shows the usefulness of dynamic optimization in deriving optimal equity recovery strategies for a cooperative lending institution. The objective is to minimize the cost of a member borrowing over time. An interest rate surcharge, above the cost of funds and operating cost, is the control variable to be determined. The financial position of the cooperative is described by equity and loan volume, which are the state variables. Applications show how the surcharge, loans, and equity change over time as model parameters are changed.