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Consistent pricing of warrants and traded options

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  • Michael Hanke
  • Klaus Pötzelberger

Abstract

Warrants issuance affects the stock price process of the issuing company. This change in the stock price process leads to subsequent changes in the prices of options written on the issuing company's stocks. In this paper, we investigate the effects of warrants issuance on the prices of traded options (bought and sold by third parties) already outstanding at the time of warrants issuance. We show how these options can be valued as portfolios of standard and compound options written on the stock of an otherwise similar company without warrants and derive a closed‐form solution for the Black‐Scholes model. An application of these results to empirical data shows that warrants issuance can have very large effects on the prices of outstanding traded options.

Suggested Citation

  • Michael Hanke & Klaus Pötzelberger, 2002. "Consistent pricing of warrants and traded options," Review of Financial Economics, John Wiley & Sons, vol. 11(1), pages 63-77.
    • Handle: RePEc:wly:revfec:v:11:y:2002:i:1:p:63-77
    DOI: 10.1016/S1058-3300(01)00035-0
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    References listed on IDEAS

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