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<p>A warrant is a financial agreement that gives the right but not the responsibility, to buy or sell a security at a specific price prior to expiration. Many researchers inadvertently utilize call option pricing models to price equity warrants, such as the Black Scholes model which had been found to hold many shortcomings. This paper investigates the pricing of equity warrants under a hybrid model of Heston stochastic volatility together with stochastic interest rates from Cox-Ingersoll-Ross model. This work contributes to exploration of the combined effects of stochastic volatility and stochastic interest rates on pricing equity warrants which fills the gap in the current literature. Analytical pricing formulas for hybrid equity warrants are firstly derived using partial differential equation approaches. Further, to implement the pricing formula to realistic contexts, a calibration procedure is performed using local optimization method to estimate all parameters involved. We then conducted an empirical application of our pricing formula, the Black Scholes model, and the Noreen Wolfson model against the real market data. The comparison between these models is presented along with the investigation of the models' accuracy using statistical error measurements. The outcomes revealed that our proposed model gives the best performance which highlights the crucial elements of both stochastic volatility and stochastic interest rates in valuation of equity warrants. We also examine the warrants' moneyness and found that 96.875% of the warrants are in-the-money which gives positive returns to investors. Thus, it is beneficial for warrant holders concerned in purchasing warrants to elect the best warrant with the most profitable and more benefits at a future date.</p>
</abstract>
In this paper, we consider the problem of pricing discretely-sampled variance swaps based on a hybrid model of stochastic volatility and stochastic interest rate with regime-switching. Our modeling framework extends the Heston stochastic volatility model by including the CIR stochastic interest rate and model parameters that switch according to a continuous-time observable Markov chain process. A semi-closed form pricing formula for variance swaps is derived. The pricing formula is assessed through numerical implementations, and the impact of including regimeswitching on pricing variance swaps is also discussed.2000 Mathematics Subject Classification. Primary 91G30; Secondary 91G20, 91B70.
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