Under the option pricing model of deposit insurance, the cost of the insurance

Question

Quizplus · Accepted Answer

The option pricing model of deposit insurance assumes that the cost of the insurance increases with the riskiness of the assets held by the DI. This is because the higher the risk, the more likely it is that a claim will be made on the insurance. The other options are incorrect: A) the cost typically increases as the insured deposit base increases, B) the cost is typically lower for shorter coverage periods, D) the cost is not directly related to market interest rates, and E) the cost is not directly related to the level of leverage used by the DI.

Under the Option Pricing Model of Deposit Insurance, the Cost