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Valuation of Covered Warrant Subject to Default Risk

Author

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  • Shen-Yuan Chen

    (Graduate Institute of Finance, National Chiao Tung University, No. 1001, Ta Hsuen Road, Hsinchu, 300, Taiwan, R.O.C.)

Abstract

There is no margin settlement mechanism for existing covered warrants in Taiwan, thus the credit risk of the warrant issuer must be considered when investors evaluate the price of a covered warrant. This paper applies the vulnerable option valuation model to empirically study the difference in the theoretical value of a vulnerable warrant, Black–Scholes option price and the market price of warrant by using the Taiwan warrant data. Empirical results show that the theoretical value of a vulnerable warrant is lower than the Black–Scholes non-vulnerable option value and its market value.

Suggested Citation

  • Shen-Yuan Chen, 2003. "Valuation of Covered Warrant Subject to Default Risk," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 21-44.
    • Handle: RePEc:wsi:rpbfmp:v:06:y:2003:i:01:n:s0219091503001018
    DOI: 10.1142/S0219091503001018
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    Citations

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    Cited by:

    1. Melek AKSU & Şakir SAKARYA, 2018. "Pricing of Covered Warrants: An Analysis on Borsa İstanbul," Sosyoekonomi Journal, Sosyoekonomi Society.
    2. Sebastiano Vitali & Vittorio Moriggia, 2021. "Pension fund management with investment certificates and stochastic dominance," Annals of Operations Research, Springer, vol. 299(1), pages 273-292, April.

    More about this item

    Keywords

    Warrant; Option; Vulnerable warrant; Credit risk; Default risk;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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