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Quantifying the recapitalization fund premium using option pricing techniques

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  • Necula, Ciprian
  • Radu, Alina-Nicoleta

Abstract

The purpose of the paper consists in developing a formula for quantifying the premium a bank is expected to pay for a fund that provides recapitalization in order to allow orderly failure if the bank is in financial distress. The main finding is that such a premium can be computed as the difference between the prices of two European put options.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 114 (2012)
Issue (Month): 3 ()
Pages: 249-251

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Handle: RePEc:eee:ecolet:v:114:y:2012:i:3:p:249-251

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Banks; Resolution fund; European put option; Volatility;

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  1. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Ronn, Ehud I & Verma, Avinash K, 1986. " Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, American Finance Association, vol. 41(4), pages 871-95, September.
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  4. Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(10), pages 2577-2603, October.
  5. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, Elsevier, vol. 1(1), pages 3-11, June.
  6. Jin-Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 4(2), pages 155-167.
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