Question
Assume that at t=0 a DI has $500 Million in Deposits, $750 Million in Assets, and that it pays an annual premium to the FDIC
Assume that at t=0 a DI has $500 Million in Deposits, $750 Million in Assets, and that it pays an annual premium to the FDIC of 27 bps for insurance coverage. Assume that we are considering the option pricing model of deposit insurance for the following questions.
a. How much does the bank pay to the FDIC at t=1?
b. If the bank's Assets and Deposits remain constant at t=1, what is the payoff to the FDIC?
c. Assume now that the bank's assets at t=1 are $450 Million and that the Deposits remain the same. What then would be the payoff to the FDIC?
d. Explain how the above scenario works in the same way that a put option works.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To answer these questions well first need to understand the basics of the deposit insurance system and how it relates to option pricing models a Annua...
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Financial Accounting Theory
Authors: William R. Scott
7th edition
132984660, 978-0132984669
