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Optimal exercise strategies for corporate warrants

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  • Christian Koziol

Abstract

In this paper, we analyse the optimal exercise strategies for corporate warrants issued by levered firms. For the analysis, we distinguish between two exercise variants, namely the traditional block exercise and competitive exercise in equilibrium. We find that the optimal exercise date under the block condition can be before or after an optimal exercise in equilibrium. Surprisingly, optimal block exercise can occur even without any dividend payments in contrast to the competitive exercise. As a consequence, the asset values and the stock volatility under block exercise fundamentally deviate from those under the competitive exercise variant. Moreover, the value of a warrant in the block case and its exercise strategy do not coincide with those of a corresponding call option which contrasts with the assumption of 'option-like' warrant valuation.

Suggested Citation

  • Christian Koziol, 2006. "Optimal exercise strategies for corporate warrants," Quantitative Finance, Taylor & Francis Journals, vol. 6(1), pages 37-54.
    • Handle: RePEc:taf:quantf:v:6:y:2006:i:1:p:37-54
    DOI: 10.1080/14697680500510662
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    Cited by:

    1. Zhou, Qing & Zhang, Xili, 2020. "Pricing equity warrants in Merton jump–diffusion model with credit risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 557(C).
    2. Christian Koziol, 2010. "Impact of Imperfect Information on the Optimal Exercise Strategy for Warrants," European Financial Management, European Financial Management Association, vol. 16(3), pages 374-399, June.
    3. Nikunj Kapadia & Gregory Willette, 2012. "Equilibrium exercise of European warrants," Review of Derivatives Research, Springer, vol. 15(2), pages 129-156, July.
    4. Carlos Miguel Glória & José Carlos Dias & João Pedro Ruas & João Pedro Vidal Nunes, 2024. "The interaction between equity-based compensation and debt in managerial risk choices," Review of Derivatives Research, Springer, vol. 27(3), pages 227-258, October.

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