2006-08-11 10:47:33 · 3 answers · asked by Truyer 5 in Business & Finance ➔ Investing
The Black–Scholes formula is a mathematical formula for the theoretical value of European put and call stock options. As (most) warrants are equivalent to these the BS formula does apply to warrants.
However, the problem is a little bit more complicated as the BS formula makes an assumption on the behaviour of stock prices, which is not true. The assumption is that the daily movements of stock prices follow random, normally distributed returns. However, in reality those return distributions have non-normal, so-called fat tails. Which means in practice that option and warrant prices are higher than one calculates with the BS formula.
2006-08-11 19:17:46 · answer #1 · answered by cordefr 7 · 0⤊ 0⤋
AnMan is not correct; you can calculate the value of a warrant with Blach-Scholes; the warrant has a 'strike price' (exercise price) and a term. If the term is forever, assume a 20 year life. Bet the theoretical value is fairly close to actual value.
2006-08-11 12:14:46 · answer #2 · answered by Michael K 6 · 1⤊ 0⤋
the BS model couldn't really value warrants well since it is an OPTION pricing model (and not a very accurate one for employee stock options).
Warrant have features and rights different than options could have so unless it is a plain vanilla warrant, you can't really use BS to value it.
2006-08-11 11:13:37 · answer #3 · answered by an_man 1 · 1⤊ 0⤋