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The payoff diagram for deposit insurance is the same as the payoff diagram for which of the following. a. long call b. short put c. short call d. none is correct

The payoff diagram for deposit insurance is the same as the payoff diagram for which of the following.

a. long call

b. short put

c. short call

d. none is correct


finance   economics   
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Answer #1

a. long call

Reason

In a deposit insurance, the one who buys it will have to pay the insurance price and thus at first, in the case of no default, there is a small loss. As there is a default, there is no limit to the payoff and thus the payoff will increase slowly from negative to infinity on a positive slope. So, it is like the payment diagram of a long call.

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