TAEG and fee structure under budget constraints

How to succeed in keeping a competitive TAEG while adhering to a profit target is an issue of great interest for financial intermediaries. Some preceeding studies provided results relating to a single financial operation; here the problem is analysed with respect to a bundle of contracts issued under budget constraints. In this paper it is shown that the optimal fees structure arises from comparison among Relative Net Present Values. A surprising fact is found when the RNPV of the loan with lowest initial outlay is greater or equal to the RNPV’s of the other loans: the optimal fees structure is met when only the variable fees are activated. The interest in this result is due to the fact that it applies to a great number of practical situations.