Interest rate model of Root Finance

Liquidity risk becomes a pressing issue as the utilization rate escalates, particularly as it approaches the upper limit of 100%. To customize the model for this particularity, the interest rate curve is segmented into two phases centered around an optimal utilization rate, Uoptimal . Prior to reaching Uoptimal the curve’s ascent is gradual; however, beyond this point, it increases significantly.

$if U <= Uoptimal: Bt = (Ut/ Uoptimal) Rslope1$

$if U > Bt = Rslope1 + (Ut −Uoptimal) /(1−Uoptimal) Rslope2$

DEPOSIT RATE

$Dt = Ut ∗ Rt ∗ (1 − Rf )$

Legend:

Utilization = U

Optimal Utilization = Uoptimal

Rate Slope 1 = Rslope1

Rate Slope 2 = Rslope2

Borrow Rate= Bt

Deposit Rate = Dt

Utilisation Rate = Ut

Borrow Rate = Bt

Reserve Factor = Rf