The Multiple Warrants Pricing Model Based On The Same Body And Their Comparison

As one of the basic financial derivatives, warrants are popular with investors. Stock purchase warrants result in news shares being issued when they are exercised. The issue of new shares would lead to price dilution which makes warrants pricing different from call option pricing in some ways. With the development and perfect of market, a lot of listed corporations simultaneously issue multiple series of warrants with different expiry. And the dilution effect in case of multiple warrants is intricate. When a corporation simultaneously issues multiple warrants, those warrants with different expiry will bring different dilution effects for the share. Meanwhile, dilution effects owing to multiple warrants are stronger than those produced by single warrant. Under these conditions, larger pricing errors will be caused if we directly price them with traditional warrants pricing model. For above reasons, we should pay more attentions to the multiple warrants pricing model based on the same body.On the base of traditional warrants pricing model, this paper analyzed shortcomings when applying the existing models to the theoretical warrant prices which are issued simultaneously by the same company. By combining the research methods for the single warrants home and abroad and considering different dilution effects for the shares with different expiry, this study presented the appropriate pricing formula for multiple warrants utilizing the martingale method and being based on the Black-Scholes pricing model, in the condition of risk-neutral. This model avoids the complicated solving process and the situation of no closed form solution of the partial differential equation in traditional stochastic differential equation. It will benefit the warranting pricing theory. The comparison among the three models is beneficial for meticulous calculation of dilution factor and hedge parameter when issuing warrants. In order to show the advantages of multiple warrants pricing model, this paper compared the KBS model to the GBE and BS models from two aspects this is, dilutions factors and hedge parameters respectively. The result showed that pricing errors arisen from GBE and BS models will be higher when having the higher potential dilution, the longer expiry and being out of money, therefore the multiple warrants pricing model demonstrates much more advantages. Because the value of hedge parameter Delta in KBS pricing model is relatively smaller, the multiple warrants pricing model based on the same body is more accurate than other single warrant models when using hedge parameters to avoid risks.