3. Utility-2 Lars is debating whether to purchase a mortgage note that is being marketed by a troubled bank. The mortgage looks good. It is backed by a piece of valuable commercial real estate and StatCo, the borrower, has a good payment history. The two uncertainties relevant to Lars' value for this mortgage note are StatCo's sales in the coming year (Strong or Weak) and whether they will default (Yes or No) at any point over the coming year. Lars values the prospect of not purchasing the loan at 0. If Lars decides to purchase the loan, he faces the prospects tabulated below. The dollar value of these prospects include the purchase price of the mortgage and appropriate time discounting Value Sale Default Smillion) Strong No ngYes No Yes 10 30 Weak Weak 35 Lars' probabilities are as P(Strong Sales) 0.9, P(Default | Strong Sales) 0.05, and P(Default I Weak Sales) = 0.35, Lars is risk-neutral. a) What is Lars' certain equivalent for the mortgage note? b) Michela is also considering purchasing the mortgage note. His probabilities and prospect dollar values are the same as Lars'. Michela has an exponential u-curve with a risk tolerance of (RT) $50 million. Given this information, what is Michela's value of clairvoyance (VOc) on the Sales uncertainty? What is Michela's VOC on the Default uncertainty? Which of the following statements are true? c) d) a. Lars VOC on Sales is less than Michela's VOC on Sales. b. Lars' VOC on Default is less than Michela's VOC on Default. c. Michela's VOC on Default equals his VOC on Sales and Default together 3. Utility-2 Lars is debating whether to purchase a mortgage note that is being marketed by a troubled bank. The mortgage looks good. It is backed by a piece of valuable commercial real estate and StatCo, the borrower, has a good payment history. The two uncertainties relevant to Lars' value for this mortgage note are StatCo's sales in the coming year (Strong or Weak) and whether they will default (Yes or No) at any point over the coming year. Lars values the prospect of not purchasing the loan at 0. If Lars decides to purchase the loan, he faces the prospects tabulated below. The dollar value of these prospects include the purchase price of the mortgage and appropriate time discounting Value Sale Default Smillion) Strong No ngYes No Yes 10 30 Weak Weak 35 Lars' probabilities are as P(Strong Sales) 0.9, P(Default | Strong Sales) 0.05, and P(Default I Weak Sales) = 0.35, Lars is risk-neutral. a) What is Lars' certain equivalent for the mortgage note? b) Michela is also considering purchasing the mortgage note. His probabilities and prospect dollar values are the same as Lars'. Michela has an exponential u-curve with a risk tolerance of (RT) $50 million. Given this information, what is Michela's value of clairvoyance (VOc) on the Sales uncertainty? What is Michela's VOC on the Default uncertainty? Which of the following statements are true? c) d) a. Lars VOC on Sales is less than Michela's VOC on Sales. b. Lars' VOC on Default is less than Michela's VOC on Default. c. Michela's VOC on Default equals his VOC on Sales and Default together
