Black-scholes approximation of warrant prices: slight return in a low interest rate environment

Philippe Bertrand ()
Additional contact information
Philippe Bertrand: Aix-Marseille Université, CERGAM EA 4225, Aix-Marseille Graduate School of management - IAE, Aix-Marseille Univ., CNRS, AMSE

Annals of Operations Research, 2024, vol. 334, issue 1, No 4, 83-100

Abstract: Abstract The objective of this paper is to emphasize the differences between a call and a warrant as well as the different valuation methods of warrants which have been introduced in the financial literature. For the sake of simplicity and applicability, we only consider a debt-free equity-financed firm. More recently a formal distinction between structural and reduced form pricing models has been introduced. This distinction is important whether one wishes to price a new warrant issue or outstanding warrants. If we are interested in pricing a new issue of warrants, e.g. in the context of a management incentive package, one has to rely on a structural model. However most of practitioners use the simple Black-Scholes formula. In this context, we analyze the accuracy of the approximation of the “true” price of a warrant by the Black-Scholes formula. We show that in the current low interest rate environment, the quality of the approximation deteriorates and the sensitivity of this approximation to the volatility estimate increases.

Keywords: Warrant; Option; Black-Scholes (search for similar items in EconPapers)
JEL-codes: D03 G11 G13 G21 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10479-022-04622-6 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:annopr:v:334:y:2024:i:1:d:10.1007_s10479-022-04622-6

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-022-04622-6

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().