The provision of deposit insurance by the FDIC is similar to having the FDIC ________ on the assets of the bank that buys the deposit insurance.

Question

Quizplus · Accepted Answer

Writing a put option gives the holder the right to sell an asset at a predetermined price. In the case of deposit insurance, the bank is effectively selling the right to withdraw deposits up to a certain amount at a predetermined price (the insured amount). Therefore, having the FDIC write a put option on the assets of the bank effectively provides deposit insurance.

The Provision of Deposit Insurance by the FDIC Is Similar