IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v11y2002i1p63-77.html
   My bibliography  Save this article

Consistent pricing of warrants and traded options

Author

Listed:
  • Michael Hanke
  • Klaus Pötzelberger

Abstract

Warrants issuance affects the stock price process of the issuing company. This change in the stock price process leads to subsequent changes in the prices of options written on the issuing company's stocks. In this paper, we investigate the effects of warrants issuance on the prices of traded options (bought and sold by third parties) already outstanding at the time of warrants issuance. We show how these options can be valued as portfolios of standard and compound options written on the stock of an otherwise similar company without warrants and derive a closed‐form solution for the Black‐Scholes model. An application of these results to empirical data shows that warrants issuance can have very large effects on the prices of outstanding traded options.

Suggested Citation

  • Michael Hanke & Klaus Pötzelberger, 2002. "Consistent pricing of warrants and traded options," Review of Financial Economics, John Wiley & Sons, vol. 11(1), pages 63-77.
    • Handle: RePEc:wly:revfec:v:11:y:2002:i:1:p:63-77
    DOI: 10.1016/S1058-3300(01)00035-0
    as

    Download full text from publisher

    File URL: https://doi.org/10.1016/S1058-3300(01)00035-0
    Download Restriction: no
    File URL: https://libkey.io/10.1016/S1058-3300(01)00035-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Toft, Klaus Bjerre & Prucyk, Brian, 1997. "Options on Leveraged Equity: Theory and Empirical Tests," Journal of Finance, American Finance Association, vol. 52(3), pages 1151-1180, July.
    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    3. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    4. Alain Bensoussan & Michel Crouhy & Dan Galai, 1994. "Stochastic equity volatility related to the leverage effect," Applied Mathematical Finance, Taylor & Francis Journals, vol. 1(1), pages 63-85.
    5. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    6. Constantinides, George M., 1984. "Warrant exercise and bond conversion in competitive markets," Journal of Financial Economics, Elsevier, vol. 13(3), pages 371-397, September.
    7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    8. Schulz, G. Uwe & Trautmann, Siegfried, 1994. "Robustness of option-like warrant valuation," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 841-859, October.
    9. Emanuel, David C., 1983. "Warrant valuation and exercise strategy," Journal of Financial Economics, Elsevier, vol. 12(2), pages 211-235, August.
    10. Crouhy, Michel & Galai, Dan, 1994. "The interaction between the financial and investment decisions of the firm: the case of issuing warrants in a levered firm," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 861-880, October.
    11. Galai, Dan & Schneller, Meir I, 1978. "Pricing of Warrants and the Value of the Firm," Journal of Finance, American Finance Association, vol. 33(5), pages 1333-1342, December.
    12. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    13. Lauterbach, Beni & Schultz, Paul, 1990. "Pricing Warrants: An Empirical Study of the Black-Scholes Model and Its Alternatives," Journal of Finance, American Finance Association, vol. 45(4), pages 1181-1209, September.
    14. Spatt, Chester S & Sterbenz, Frederic P, 1988. " Warrant Exercise, Dividends, and Reinvestment Policy," Journal of Finance, American Finance Association, vol. 43(2), pages 493-506, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hanke, Michael & Potzelberger, Klaus, 2002. "Consistent pricing of warrants and traded options," Review of Financial Economics, Elsevier, vol. 11(1), pages 63-77.
    2. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    3. José Eduardo Correia & João Duque, 2008. "Dilution and Dividend Effects on the Portuguese Equity Warrants Market," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(2), pages 161-192.
    4. Darsinos, T. & Satchell, S.E., 2002. "On the Valuation of Warrants and Executive Stock Options: Pricing Formulae for Firms with Multiple Warrants/Executive Options," Cambridge Working Papers in Economics 0218, Faculty of Economics, University of Cambridge.
    5. Veld, C.H., 1991. "Warrant pricing : A review of theoretical and empirical research," Other publications TiSEM ac252bad-d1c0-45d6-832a-f, Tilburg University, School of Economics and Management.
    6. Nikunj Kapadia & Gregory Willette, 2012. "Equilibrium exercise of European warrants," Review of Derivatives Research, Springer, vol. 15(2), pages 129-156, July.
    7. David C. Leonard & Michael E. Solt, 1990. "On Using The Black-Scholes Model To Value Warrants," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 81-92, June.
    8. George Chacko & Peter Tufano & Geoffrey Verter, 2000. "Cephalon, Inc. Taking Risk Management Theory Seriously," NBER Working Papers 7748, National Bureau of Economic Research, Inc.
    9. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    10. Xiao, Wei-Lin & Zhang, Wei-Guo & Yao, Zheng & Wang, Xiao-Hui, 2013. "The impact of issuing warrant and debt on behavior of the firm's stock," Economic Modelling, Elsevier, vol. 31(C), pages 635-641.
    11. Cremers, Martijn & Driessen, Joost & Maenhout, Pascal & Weinbaum, David, 2008. "Individual stock-option prices and credit spreads," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2706-2715, December.
    12. K.J. Martijn Cremers & Joost Driessen & Pascal Maenhout, 2008. "Explaining the Level of Credit Spreads: Option-Implied Jump Risk Premia in a Firm Value Model," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2209-2242, September.
    13. Darsinos, T. & Satchell, S.E., 2002. "The Implied Distribution for Stocks of Companies with Warrants and/or Executive Stock Options," Cambridge Working Papers in Economics 0217, Faculty of Economics, University of Cambridge.
    14. 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.
    15. Hanke, Michael, 2005. "Pricing options on leveraged equity with default risk and exponentially increasing, finite maturity debt," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 389-421, March.
    16. A. Bensoussan & M. Crouhy & D. Galai, 1995. "Stochastic equity volatility related to the leverage effect II: valuation of European equity options and warrants," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(1), pages 43-60.
    17. Oleg Sokolinskiy, 2019. "Debt rollover-induced local volatility model," Review of Quantitative Finance and Accounting, Springer, vol. 52(4), pages 1065-1084, May.
    18. Alex Backwell & Thomas A. McWalter & Peter H. Ritchken, 2022. "On buybacks, dilutions, dividends, and the pricing of stock‐based claims," Mathematical Finance, Wiley Blackwell, vol. 32(1), pages 273-308, January.
    19. John C. Handley, 1995. "The Pricing of Underwriting Risk in Relation to Australian Rights Issues," Australian Journal of Management, Australian School of Business, vol. 20(1), pages 43-74, June.
    20. 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).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:11:y:2002:i:1:p:63-77. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.