Category: Money tips Release Date: 2006-08-30
With the stock further in-depth reform, following the New Steel and Vanadium's share reform program for the first time appeared Put Warrants, the Wuhan Iron and Steel's share reform program is also to be outdone, American-style warrants was first proposed, and includes the sale back to the terms of financial innovation, much more played an increasingly strong trend. Different warrants and contain different provisions, requires a different method of valuation. In general, the estimated value of warrants of the most common methods are BS model, binary tree model and Mengtekeluo simulation. Among them, the former for the analytical method, the latter two for the numerical method. These methods have their own advantages and disadvantages and scope of application, there is no way which is absolutely better than another.
BS model first assumes that the underlying asset price follows geometric Brownian motion, and then the underlying assets and warrants to construct a risk-free portfolio, its earnings for the risk-free interest rate, thus get a differential equation, the solution of this equation is that warrants the pricing formula . As the BS model obtained is accurate analytic style, and thus using the BS pricing model tend to be more accurate. Take advantage of this analytic style, we can also get the C of E relative to the value of the sensitivity of various factors, such as Delta, Theta, etc., and hedge accordingly. However, BS model generally only the more conventional European-style covered warrants (the result that only two kinds of profit and loss state) to the pricing of American-style, path-dependent pricing of such warrants are powerless.
Binary tree warrants pricing model as early as in 1979 have been proposed, now has become the financial sector warrants the most basic pricing methods. The basic starting point is: Suppose the asset price movement is by a large number of small amplitude two values of movement composition, with a discrete random walk model to simulate the continuous movement of asset prices may follow the path. At the same time the use of no-arbitrage pricing theory or the risk-neutral valuation principle to obtain each node of the underlying asset prices, then the profits and losses according to the situation warrants, from the end of the T moment onwards, pushing down the price of warrants calculated. When the binomial tree model the length of time between successive two-step tends to zero when the model will converge to the BS model. Its advantage lies in its relatively simple and intuitive, can be more complex American-style warrants and other warrants pricing, such as Wuhan Iron and Steel's share reform program proposed by the American in regard to warrants and Everbright Securities Company warrants to be issued in Bermuda (the holder can be duration in a certain period of time by non-professionals right). However, it is assumed that within a short period of time the price of the underlying assets, only the probability of a specific direction to the two campaigns, is not convincing.
Monte Carlo simulation method is a simulation of the underlying asset prices through the random motion path to be the value of the expected value of the numerical method warrants is also an application of a very wide warrant pricing. It also uses risk-neutral valuation principle, the basic idea is: from the initial moments of the underlying asset prices began, according to assume that the random path to simulate a large number of underlying assets of the maturity value, calculate the price of each maturity proceeds under the warrants, find the mean, and then to discount risk-free interest rate, we get the warrant valuation. Monte Carlo method has the advantage of application is relatively straightforward, able to handle a number of profit and loss status of a very complex situation, especially the path-dependent Warrants (yield to maturity depends on the U.S. Dollar). For example, it can be a long power warrants (for the equity warrants, including terms of sale back to profit and loss status of the more complex) and the exercise price depends on the parity of the path dependence warrants (strictly speaking, China's current stock market appear warrants are for the path dependence of E) to the pricing. But it is not good at dealing with American-style warrants, and often longer time required for the calculation.
The above-mentioned three kinds of methods are used in a risk-neutral pricing, or non-arbitrage pricing theory, the warrants can be of conventional pricing, in which BS model is the analytic methods used in the valuation to be accurate for some, but the other two is applicable to a wider range一� The warrant is expected to launch the follow-up will include more complex terms, for these provisions, investors should analyze their yield to maturity on the impact of warrants to elect the appropriate valuation method, to grasp the investment opportunities.
