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January/February 1990, 
Vol. 72, No. 1
Posted 1990-01-01

On the Use of Option Pricing Models to Analyze Deposit Insurance

by Mark D. Flood

Mark D. Flood outlines the basic theory of option pricing, which was originally developed to assign dollar values to the option contracts traded on financial exchanges. The author then illustrates how an option model can be usefully employed to analyze the claims of bankers, depositors and insurers on the assets of a bank or thrift by applying the model to several insurance arrangements. Finally, Flood considers some of the limitations of this approach.