The use of the option pricing model to determine the actuarially fair premium for deposit insurance indicates that the cost of the insurance should rely on both the asset quality and level of leverage of the DTI.

Question

Quizplus · Accepted Answer

The option pricing model takes into account the probability of default of the DTI, which is influenced by both the quality of the DTI's assets and its level of leverage. Therefore, the use of this model suggests that the cost of deposit insurance should be based on these factors.

The Use of the Option Pricing Model to Determine the Actuarially