Empirical model for evaluation of management of deposit warranty agencies in Thailand on basis of adaptation to use derivative instrument named Option under Black-Scholes Merton Model

Abstract

This research has objective to adapt theory of Black-Scholes Merton Model to compute cost of deposit warrant of deposit warranty corporations in Thailand, considering risk in the existing systems. Deposit warranty rate that deposit warranty corporations collect from financial institutes is the stable rate under deposit warranty rate in stable system which will cause damaged result to deposit warranty corporations because banks and finance and securities companies have motivation to manage risk to be fallen to deposit warranty corporations causing distorting condition and unfairness to financial institutes and taxpayers. 
            The researcher adapted Merton Model to compute cost of deposit warrant of sample group of financial institutes in the period before 1997 crisis. The result appeared that risk of assets of financial institutes was different. The considered deposit warranty rate covering risk condition should have different risk rate. Furthermore, the researcher tested the hypothesis related to entering to receive risk of financial institutes in sample group, it was found that most financial institutes have behavior of passing on risk burden to deposit warranty corporations successfully. Therefore, staff of deposit warranty corporations should adapt new policy which determine cost of deposit warrant on basis of Put Option Agreement under Merton Model.