What are possible costs and benefits of the bet for melvin

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Reference no: EM131221523

Suppose Melvin's Bank can make a bet on derivatives that has a two-thirds probability of earning $20 and a one-third probability of losing $40.

a. Assume Melvin has $20 in capital. What are the possible costs and benefits of the bet for Melvin and the deposit insurance fund? Is Melvin likely to make the bet?

b. How are the answers in part (a) different if Melvin's Bank has $50 in capital? What if it has $0 in capital?

c. In light of these examples, discuss the benefits of

(i) capital requirements

(ii) bank supervision, and

(iii) quick closure of insolvent banks.

Reference no: EM131221523

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