A closed-form approximation for valuing European basket warrants under credit risk and interest rate risk

Yung-Ming Shiu, Pai-Lung Chou and Jen-Wen Sheu

Quantitative Finance, 2013, vol. 13, issue 8, 1211-1223

Abstract: Over the past few years, many financial institutions have actively traded basket warrants in the over-the-counter market. Prior research has proposed an approach to valuing single-stock options subject to credit. However, this approach cannot be applied directly to the case of basket warrants. Using the martingale method, we propose a closed-form approximation for valuing European basket warrants using a continuous-time model, with credit risk and interest rate risk considered simultaneously. Finally, several numerical examples are utilized to demonstrate the characteristics of basket warrants under credit risk.

Date: 2013
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DOI: 10.1080/14697688.2012.741693

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