✦ LIBER ✦

On the valuation of warrants

✍ Scribed by John C. Handley

Publisher: John Wiley and Sons
Year: 2002
Tongue: English
Weight: 129 KB
Volume: 22
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.10032

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

This article addresses a misconception in the literature concerning the valuation of warrants when a warrant is
treated as an option on the stock of the underlying firm. The magnitude and timing of the impact of a warrant
issue on the underlying stock price and on the wealth of the firm's shareholders is examined within a
continuous‐time arbitrage‐free economy. In particular, it is shown that the stock price of the
underlying firm conditionally reflects dilution at all times following the announcement of a warrant issue and
notwithstanding that the warrants might not even have been issued yet. Valuing a warrant or convertible security
as an option on the post‐announcement underlying stock price means there is no need for any
explicit adjustment for dilution to be made to the chosen option pricing model. © 2002 Wiley
Periodicals, Inc. Jrl Fut Mark 22:765–782, 2002

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