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On the valuation of warrants
Author(s) -
Handley John C.
Publication year - 2002
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10032
Subject(s) - warrant , valuation (finance) , economics , convertible bond , arbitrage , stock (firearms) , financial economics , stock price , shareholder , valuation of options , call option , put option , black–scholes model , actuarial science , business , finance , volatility (finance) , bond , corporate governance , mechanical engineering , paleontology , series (stratigraphy) , engineering , biology
This article addresses a misconception in the literature concerning the valuation of warrants when a warrant istreated as an option on the stock of the underlying firm. The magnitude and timing of the impact of a warrantissue on the underlying stock price and on the wealth of the firm's shareholders is examined within acontinuous‐time arbitrage‐free economy. In particular, it is shown that the stock price of theunderlying firm conditionally reflects dilution at all times following the announcement of a warrant issue andnotwithstanding that the warrants might not even have been issued yet. Valuing a warrant or convertible securityas an option on the post‐announcement underlying stock price means there is no need for any explicit adjustment for dilution to be made to the chosen option pricing model. © 2002 WileyPeriodicals, Inc. Jrl Fut Mark 22:765–782, 2002