Economics, Econometrics and Finance
8 years ago

Unveiling the Hidden Costs of Loan Guarantees and Deposit Insurance

Journal of Banking & Finance
An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory
Robert C. Merton

Paper Summary

The article explains how to calculate the cost of providing loan guarantees and deposit insurance. The researchers found a way to use option pricing theory to determine this cost by comparing loan guarantees to stock put options. This method helps in understanding the financial implications of offering guarantees in loan agreements.

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