Category: Money tips Release Date: 2006-11-19
Warrants give holders to provide profit and loss state is uncertain, and its profit and loss during the period of performance by the warrant price and the line of the underlying securities, the difference in price between the right decisions, and the underlying securities in the price of warrants during the period of performance is impossible to predict, therefore, to Warrant pricing difficult.
After continuous attempts, investors can take advantage of the C of E found in the subject securities and risk-free loan to build a portfolio, so that warrants the investment portfolio and provide the same profit and loss state, so in the market there is no risk-free arbitrage situation, the investment combined with the warrants should have the same value, the price of warrants is the same as the present value of the investment portfolio.
All of the warrants pricing model, are trying to find an equivalent portfolio with the warrants, which are derived the idea is the same. The difference is that, each from a different angle to describe the state of the underlying stock price movement.
Simple example: the basic principles of warrant pricing
In order to clarify the basic principles of warrant pricing, let's start from a simple example:
Assume that there is an oil company, the current price of 10 yuan per share, pre-invested a lot of exploration of the company's equipment for oil exploration, in today's stock market closed, the company will announce its oil exploration results: the success or failure; the next day The shares will resume trading normally, after the resumption of the price limit is 10%. It can be predicted, when the exploration results for the success, the stock the next day to daily limit (ie up 10%, 11 yuan per share); when the exploration results for the failure, the company's initial investment in a large number of exploration equipment and manpower will be subject to losses, The next day the stock will be lower limit (ie, decreased by 10%, 9 yuan per share).
Now, the market there are two investors, investor A holder of two warrants of the company, the basic terms as follows:
Exercisable at a price: 10
Implementation date: The next day (ie, exploration results announcement the next day)
Billing: Stock
Line of the right ratio: 1:1
Investor B's investment portfolio held as follows:
A share of the oil company's stock + 9 yuan interest-free loans (due the next day)
From the current point of view, investors A and B are facing the uncertainty of the success of oil exploration, which directly affect their day's proceeds to investors in terms of A:
The proceeds of oil exploration success is: 2 * (11-10) = 2 million;
Failure of the proceeds of oil exploration as follows: 0 (because at this time do not warrant the performance value)
Investor B is as follow:
The proceeds of oil exploration success :11-9 = 2 million;
Earnings for the failure of oil exploration :9-9 = 0 million; (assuming the lower limit on the transaction is active)
From the proceeds of the results, investor A and investor B gains the next day is the same (not a result of oil exploration and different), therefore, from the current point of view, they have a portfolio should have the same value, otherwise, investors can purchase a combination of low prices and selling price of a combination of high-risk-free arbitrage, therefore, the price of the company's warrants as follows:
(10-9) / 2 = 0.5 yuan.
The above example is very simple, but it reveals the core of warrant pricing principle:
(1) In the current market, looking at its expiration date and the warrants have the same benefits the state's investment portfolio;
(2) market there is no risk-free arbitrage opportunities;
(3) The present value of the portfolio is the warrant price.
Behind, we will use the basic principles described above briefly explain to the investors warrants priced classical models: binomial tree model, BS model.
