WARRANT PRICING USING OBSERVABLE VARIABLES

Author: Andrey D. Ukhov

Source: The Journal of Financial Research, Volume 27, Number 3, September 2004 , pp. 329-339(11)

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Abstract:

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.

Keywords: G13; G63

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1475-6803.2004.00100.x

Publication date: 2004-09-01