Covered warrant valuation: a costly hedging model
Whalley, A. Elizabeth (2011) Covered warrant valuation: a costly hedging model. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre.. (Unpublished)Full text not available from this repository.
We provide a new, supply-side explanation for the consistent, statistically signiﬁcant, empirical observation that covered warrant prices are higher than those of corresponding traded options. Covered warrant market-makers, who set prices, are also the issuers and always have net short positions. Their reservation prices for redeeming or issuing more warrants reﬂect the change in their total hedgingrelated costs. For overall net short positions we show both bid and ask reservation prices lie above perfect-market values, since transaction costs increase both issuers’ marginal costs of warrant issuance and the marginal beneﬁts of warrant redemption. The model generates prices and bid-ask spreads consistent with existing empirical evidence and also new testable implications.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HJ Public Finance|
|Divisions:||Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
|Publisher:||Warwick Business School, Financial Econometrics Research Centre|
|Place of Publication:||Coventry|
|Number of Pages:||42|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Restricted or Subscription Access|
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