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WARRANT PRICING USING OBSERVABLE VARIABLES
Author(s) -
Ukhov Andrey D.
Publication year - 2004
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2004.00100.x
Subject(s) - warrant , unobservable , variance (accounting) , econometrics , economics , value (mathematics) , enterprise value , stock (firearms) , variable (mathematics) , mathematics , financial economics , statistics , accounting , mechanical engineering , mathematical analysis , engineering
The classical warrant pricing formula requires knowledge of the firm value and of the firm‐value process variance. When warrants are outstanding, the firm value itself is a function of the warrant price. Firm value and firm‐value variance are then unobservable variables. I develop an algorithm for pricing warrants using stock prices, an observable variable, and stock return variance. The method also enables estimation of firm‐value variance. A proof of existence of the solution is provided.
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