Warrant Pricing Using Observable Variables
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Ukhov, Andrey D.
The classical warrant pricing formula requires knowledge of the variance of the firm value process, and the firm value. When warrants are outstanding the firm value itself is a function of the warrant price. Firm value and the variance of the firm value are then unobservable variables. I develop an algorithm for pricing warrants using stock prices, an observable variable, and variance of stock returns. The method also enables estimation of the variance of firm value. A proof of existence of the solution is provided.
warrant pricing; contingent claims pricing
Required Publisher Statement: © Wiley. Final version published as: Ukhov, A. D. (2004). Warrant pricing using observable variables. Journal of Financial Research, 27(3), 329-339. DOI: 10.1111/j.1475-6803.2004.00100.x. Reprinted with permission. All rights reserved.