19-74 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

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Writing a put option gives the buyer of the option the right, but not the obligation, to sell assets at a specified price. Similarly, the FDIC offers deposit insurance that gives depositors the right to sell their deposits to the FDIC at a guaranteed price in the event of a bank failure. Therefore, the provision of deposit insurance by the FDIC is similar to having the FDIC write a put option on the assets of the bank that buys the deposit insurance.

19-74 the Provision of Deposit Insurance by the FDIC Is