Valuation of deposit insurance Black–Scholes model using Banach contraction principle

Deposit insurance is a mechanism by which financial institutions are stabilized. The danger of a bank’s inability to meet its consumer commitments due to its suspended license is insured through deposit insurance practices. A flat-rate insurance scheme would contribute to moral hazard and a financia...

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Bibliographic Details
Published in:Partial differential equations in applied mathematics : a spin-off of Applied Mathematics Letters 2023-12, Vol.8, p.100571, Article 100571
Main Authors: Edeki, Sunday O., Fadugba, Sunday E., Khalique, Chaudry Masood
Format: Article
Language:English
Subjects:
Analytical solutions
Black–Scholes model
Deposit insurance
Option pricing
Partial differential equations
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Summary:Deposit insurance is a mechanism by which financial institutions are stabilized. The danger of a bank’s inability to meet its consumer commitments due to its suspended license is insured through deposit insurance practices. A flat-rate insurance scheme would contribute to moral hazard and a financial panic when banks indulge in dangerous practices. Hence, a reliable model with an explicit solution is required. This paper considers a risk rate model for deposit insurance engendered by the classical Black Scholes Option Pricing Model. The solutions are obtained via the application of Banach Contraction Mapping or Method. The procedures involved are straightforward, easy, and flexible, even without giving up accuracy. The desired explicit solutions are obtained with less computational time.
ISSN:2666-8181
2666-8181
DOI:10.1016/j.padiff.2023.100571