Valuation risk adjusted deposit insurance on heston model

Abstract

Deposit insurance is a tool to stabilize the banking system. In managing deposit insurance in Indonesia, deposit insurance agency applies the flat rate premiun system which is the same premium imposition system for each bank without taking into account the different risk levels of each bank. The implementation of the flat rate, it can still cause moral hazard which can trigger the monetary crisis. To anticipate this problem, it is necessary to design a risk adjusted premium. One of method that can be used in determining deposit insurance premium is Fourier transform. In this study, we analyzed analytical solutions to determine risk adjusted deposit insurance premiums on Heston Model by using Fourier transforms. Based on the simulation results, it was found that the amount of volatility caused the value of deposit insurance premiums getting bigger, the smaller value of interest rates so the greater value of deposit insurance premiums. The high value of deposit insurance premiums is also influenced by the value of debt obligations and dividends value.