Covered Warrants With Combined Reset Rights On Strike And Maturity

This paper examines the out-of-sample performance of the pricing model applied to the valuation of covered warrants traded on the Hongkong Stock Exchange. Pricing biases related to warrant strike price, time to maturity, volatility, and risk-free interest rate are also considered in this study. The results indicate that the GARCH model outperforms Black-Scholes model in predicting the warrant prices, indicating that the pricing model incorporated with stochastic volatility feature can improve the pricing of warrants. It uses the historical simulation approach, similar to that of Green and Figlewski to investigate the effects of market imperfections and model errors on financial institutions writing derivative warrants. This paper also analyzes the covered warrants with combined reset rights on strike and maturity, the optimal reset policy commences only at those times when two necessary conditions are satisfied. The behaviors of the reset policies depend on the relative magnitude of the risk less interest rate r and dividend yield q , the multiplicative factorαin defining the new strike and the price of underling asset is also relevant to the reset policy.