Monday, November 3, 2008

Taking advantage of the market crash

A crash in the financial market is not essentially bad for everyone. There are a number of industries that thrive in such an environment. For example, the repossessed vehicle market is overflowing with inventory. While this may hurt banks and other financial institutions that are willing to auction off these vehicles to cut their losses, there are many people out there who wouldn't mind driving a nicer car without having to pay the price, well, at least not the sticker price...

According to npr, "vehicle repossessions are up 10% this year" and approximately 1.6 million vehicles are estimated to be repossessed by the end of the year. As a result, some lending companies are starting to 'adjust' the loans with the borrowers instead of repossessing their vehicles.

From the lenders point of view, an interesting optimization problem would be to identify the optimal number of vehicles to repossess versus adjust. A number of lending companies might be interested in such a problem due to the complexity of this decision. The amount of money saved due to repossessing the vehicle should offset the opportunity cost of receiving payments from the buyer as well as the logistics and inventory cost of transporting and holding repossessed vehicles. Such an optimization problem would also incorporate a 'risk' factor that includes the probability that borrowers may in fact pull themselves out of the economic trough sooner than later.

Food for thought...

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