Adaptation of warrant price with Black Scholes model and historical volatility

Aziz, Khairu Azlan Abd; Idris, Mohd Fazril Izhar Mohd; Saian, Rizauddin; Daud, Wan Suhana Wan

doi:10.1063/1.4915886

Cited by 3 publications

(2 citation statements)

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“…This implies that the dilution adjustment to the BS model improves the accuracy in estimating the prices for warrants. Aziz et al [8] shows that warrant is overpriced when the volatility is too high and is under-priced when the volatility is too low. Therefore, a possible future work is to price warrants in a model that incorporates stochastic volatility.…”

Section: Resultsmentioning

confidence: 99%

A review on Black-Scholes model in pricing warrants in Bursa Malaysia

Gunawan¹,

Ibrahim²,

Rahim³

2017

AIP Conference Proceedings

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Section: Resultsmentioning

confidence: 99%

A review on Black-Scholes model in pricing warrants in Bursa Malaysia

Gunawan¹,

Ibrahim²,

Rahim³

2017

AIP Conference Proceedings

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“…Theoretically, warrants and options are very similar, whereby an option is a contract with the dealer or seller of the option [11]. Moreover, the options valuation method might also be associated with warrants, as these two financial derivatives have many similarities [8].…”

Section: Equity Warrantsmentioning

confidence: 99%

A Comprehensive Literature Review on Pricing Equity Warrants Using Stochastic Approaches

Ibrahim¹,

Roslan²,

Jameel³

2021

ujaf

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Prior studies revealed that most researchers tend to employ the Black Scholes model to price equity warrants. However, the Black Scholes model was found deficient by contributing to large estimation errors and mispricing of equity warrants. Therefore, issues involving equity warrants are discussed in this paper, by focusing on specific topics and respective stochastic models to provide a basis for improvements in future research. In recent years, stochastic approaches have been used to a great extent among researchers due to the expansive applications in both theoretical and practical sense. Subsequently, this paper provides the results of a comprehensive literature review on various stochastic modelling methods and its applications for pricing financial derivatives in terms of applications, modifications of methods, comparisons with other methods, and general related researches. Focus is given on two types of stochastic models namely stochastic volatility and stochastic interest rate models, along with the discussions associating these two types of models. This paper acts as a valuable source of information for academic researchers and practitioners not only for pricing financial instruments, but also in various other fields involving stochastic techniques.

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Stochastic pricing formulation for hybrid equity warrants

Roslan¹,

Karim²,

Ibrahim³

et al. 2021

MATH

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<abstract> <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>

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Adaptation of warrant price with Black Scholes model and historical volatility

Cited by 3 publications

References 0 publications

A review on Black-Scholes model in pricing warrants in Bursa Malaysia

A review on Black-Scholes model in pricing warrants in Bursa Malaysia

A Comprehensive Literature Review on Pricing Equity Warrants Using Stochastic Approaches

Stochastic pricing formulation for hybrid equity warrants

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