Back to Search
Start Over
Black-scholes approximation of warrant prices: slight return in a low interest rate environment.
- Source :
-
Annals of Operations Research . Mar2024, Vol. 334 Issue 1-3, p83-100. 18p. - Publication Year :
- 2024
-
Abstract
- The objective of this paper is to emphasize the differences between a call and a warrant as well as the different valuation methods of warrants which have been introduced in the financial literature. For the sake of simplicity and applicability, we only consider a debt-free equity-financed firm. 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. [ABSTRACT FROM AUTHOR]
- Subjects :
- *INTEREST rates
*PRICES
*WARRANTS (Law)
*STRUCTURAL models
*VALUATION
Subjects
Details
- Language :
- English
- ISSN :
- 02545330
- Volume :
- 334
- Issue :
- 1-3
- Database :
- Academic Search Index
- Journal :
- Annals of Operations Research
- Publication Type :
- Academic Journal
- Accession number :
- 176081449
- Full Text :
- https://doi.org/10.1007/s10479-022-04622-6