A Reduced-Form Model for Warrant Valuation

Jarrow, Robert A.; Trautmann, Siegfried

doi:10.1111/j.1540-6288.2011.00306.x

Cited by 8 publications

(7 citation statements)

References 23 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…As a consequence, the Black-Scholes formula remains a useful tool for warrant valuation in the case of a single warrant issue, with the warrant's issue premium having no effect. This agrees with the findings in Jarrow and Trautmann (2011) and with Sidenius (1996), whose work did not take issue premiums into account.…”

Section: Pricing a Single Warrant To Account For The Issue Premiumsupporting

confidence: 93%

Multiple warrant issues: are issue premiums important?

Dayananda

Kemper

2015

IJFMD

View full text Add to dashboard Cite

Premiums collected when warrants are issued become part of a firm's capital and are taken into account in the valuation of a company. In this paper formulae are developed to fairly value warrants in the case where multiple warrant issues are outstanding, including consideration of issue premiums collected, extending results in Dayananda and Kemper (2010). The models developed are 'reduced-form' models of the type utilised by Jarrow and Trautmann (2011) and shown to be preferred in Jarrow and Protter (2004). Fair values taking premiums into account are compared with traditional Black-Scholes values and with values that ignore premiums. Comparisons are also made to market prices for a public company with two issues of warrants outstanding. Under conditions generally in effect when multiple issues of warrants exist, the effect of warrant issue premiums may be safely ignored.

show abstract

Section: Pricing a Single Warrant To Account For The Issue Premiumsupporting

confidence: 93%

Multiple warrant issues: are issue premiums important?

Dayananda

Kemper

2015

IJFMD

View full text Add to dashboard Cite

show abstract

“…As in credit risk studies 1 , warrant pricing models fall into either the "structural" or the "reduced form" category. Strictly speaking, this distinction has been rst put forward quite recently in the literature on warrant pricing by Jarrow and Trautmann (2011). But the works of Bensoussan, Crouhy and Galai (1994, 1995aand 1995b already made this distinction without using the same terminology.…”

Section: Black-scholes Approximation Of Warrant Prices: Slight Return...mentioning

confidence: 99%

“…These models deal directly with the dilution e¤ect, that is the increase in shares if warrants are exercised. To the contrary, a reduced-form model starts with the assumptions about the stock price process and the outstanding warrants, meaning that they have already been issued (see Jarrow and Trautmann, 2011).…”

Section: Black-scholes Approximation Of Warrant Prices: Slight Return...mentioning

confidence: 99%

“…A structural model, based on the value and on the volatility of the rm's assets, is well designed to price a new issue of warrant because in this case the stock price does not already reect the fact that the warrant exists. As rst shown by and Handley (2002) and then developed in more depth by Jarrow and Trautmann (2011), a reduced form model is more appropriate for outstanding warrant because in a e¢cient market, "the stock price of the underlying rm conditionally reects dilution at all times following announcement of a warrant issue". Therefore, "pricing a warrant as a call option on the stock of the underlying rm does not actually ignore dilution because dilution already should be reected in the underlying stock price before expiration of the warrant".…”

Section: Black-scholes Approximation Of Warrant Prices: Slight Return...mentioning

confidence: 99%

“…The use of a Black-Scholes model with a GBM for the stock price dynamics seems to contradict what was said in section 3.1.1 on the variation over time of stock volatility in a structural model. But, Jarrow and Trautmann (2011) showed that a reduced-form model could be compatible with a GBM, in particular with a constant volatility of the stock. Their argument rely on the di¤erence of the information set 9 in a structural and a reduced form model.…”

Section: Warrant As a Call Option On The Stock Of The Rmmentioning

confidence: 99%

See 2 more Smart Citations

Black-scholes approximation of warrant prices: slight return in a low interest rate environment

Bertrand

2022

Ann Oper Res

View full text Add to dashboard Cite

The objective of this paper is to emphasize the di¤erences between a call and a warrant as well as the di¤erent valuation methods of warrants which have been introduced in the nancial literature. For the sake of simplicity and applicability, we only consider a debt-free equitynanced rm. More recently a formal distinction between structural and reduced form pricing models has been introduced. This distinction is important whether one wishes to price a new warrant issue or outstanding warrants. If we are interested in pricing a new issue of warrants, e.g. in the context of a management incentive package, one has to rely on a structural model. However most of practitioners use the simple Black-Scholes formula. In this context, we analyze the accuracy of the approximation of the "true" price of a warrant by the Black-Scholes formula. We show that in the current low interest rate environment, the quality of the approximation deteriorates and the sensitivity of this approximation to the volatility estimate increases.

show abstract

New Warrant Issues Valuation with Leverage and Equity Model Errors

Simonato

2013

J Financ Serv Res

View full text Add to dashboard Cite

A Reduced-Form Model for Warrant Valuation

Cited by 8 publications

References 23 publications

Multiple warrant issues: are issue premiums important?

Multiple warrant issues: are issue premiums important?

Black-scholes approximation of warrant prices: slight return in a low interest rate environment

New Warrant Issues Valuation with Leverage and Equity Model Errors

Contact Info

Product

Resources

About