Use the information given below to answer the following questions). Below is a payoff table that lists three mortgage options: $$\begin{array} { | l | l | l | l | }
\hline & { \text { Outcome } } \
\hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \
\hline \text { 2-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \
\hline \text { 5-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \
\hline \text { 25-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \
\hline
\end{array}$$
-What is the maximum opportunity loss incurred for the 2-year ARM?
A) $ 8,626
B) $ 13,716
C) $ 14,369
D) $ 10,581

Question

Use the information given below to answer the following questions). Below is a payoff table that lists three mortgage options: $$\begin{array} { | l | l | l | l | } 
\hline &  { \text { Outcome } } \
\hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \
\hline \text { 2-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \
\hline \text { 5-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \
\hline \text { 25-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \
\hline
\end{array}$$
-What is the maximum opportunity loss incurred for the 2-year ARM?
A) $ 8,626
B) $ 13,716
C) $ 14,369
D) $ 10,581

Quizplus · Accepted Answer

The maximum opportunity loss for the 2-year ARM is calculated by comparing the cost of the 2-year ARM in each scenario to the best (lowest cost) option in that scenario. For "Rates Rise," the best option is the 25-year fixed at $52,276, so the opportunity loss is $66,645 - $52,276 = $14,369. For "Rates Stable," the opportunity loss is smaller, and for "Rates Fall," it's even smaller. Therefore, the maximum opportunity loss is $14,369.

Use the Information Given Below to Answer the Following Questions)