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Pricing levered warrants with dilution using observable variables

Author

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  • Isabel ABÍNZANO
  • Javier F. Navas

Abstract

We propose a valuation framework for pricing European call warrants on the issuer’s own stock that allows for debt in the issuer firm. In contrast to other works that also price warrants with dilution issued by levered firms, ours uses only observable variables. Thus, we extend the models of Crouhy and Galai [ J. Bank. Finance , 1994, 18 , 861--880] and Ukhov [ J. Financ. Res. , 2004, 27 (3), 329--339]. We provide numerical examples to study some implementation issues and to compare the model with existing ones.

Suggested Citation

  • Isabel ABÍNZANO & Javier F. Navas, 2013. "Pricing levered warrants with dilution using observable variables," Quantitative Finance, Taylor & Francis Journals, vol. 13(8), pages 1199-1209, July.
    • Handle: RePEc:taf:quantf:v:13:y:2013:i:8:p:1199-1209
    DOI: 10.1080/14697688.2013.771280
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    Cited by:

    1. Xiao, Weilin & Zhang, Weiguo & Zhang, Xili & Chen, Xiaoyan, 2014. "The valuation of equity warrants under the fractional Vasicek process of the short-term interest rate," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 394(C), pages 320-337.
    2. Xiao, Weilin & Zhang, Xili, 2016. "Pricing equity warrants with a promised lowest price in Merton’s jump–diffusion model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 219-238.
    3. Zhou, Qing & Zhang, Xili, 2020. "Pricing equity warrants in Merton jump–diffusion model with credit risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 557(C).
    4. Chesney, Marc & Stromberg, Jacob & Wagner, Alexander F. & Wolff, Vincent, 2020. "Managerial incentives to take asset risk," Journal of Corporate Finance, Elsevier, vol. 65(C).
    5. Joshua D. Anderson & John E. Core, 2018. "Managerial Incentives to Increase Risk Provided by Debt, Stock, and Options," Management Science, INFORMS, vol. 64(9), pages 4408-4432, September.

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