Black-Scholes Approximation of Warrant Prices: Slight Return in a Low Interest Rate Environment - Aix-Marseille Université Access content directly
Journal Articles Annals of Operations Research Year : 2022

Black-Scholes Approximation of Warrant Prices: Slight Return in a Low Interest Rate Environment

Abstract

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.
Fichier principal
Vignette du fichier
BS Approximation of Warrant Prices PhB 17 09 2021.pdf (943.54 Ko) Télécharger le fichier
Origin Files produced by the author(s)

Dates and versions

hal-03672714 , version 1 (19-05-2022)

Identifiers

Cite

Philippe Bertrand. Black-Scholes Approximation of Warrant Prices: Slight Return in a Low Interest Rate Environment. Annals of Operations Research, In press, ⟨10.1007/s10479-022-04622-6⟩. ⟨hal-03672714⟩
72 View
156 Download

Altmetric

Share

Gmail Mastodon Facebook X LinkedIn More