The Library
Covered warrant valuation: a costly hedging model
Tools
Whalley, A. Elizabeth (2011) Covered warrant valuation: a costly hedging model. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. (Unpublished)
Research output not available from this repository.
Request-a-Copy directly from author or use local Library Get it For Me service.
Abstract
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 | ||||
Official Date: | 2011 | ||||
Dates: |
|
||||
Number of Pages: | 42 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Publication Status: | Unpublished | ||||
Access rights to Published version: | Restricted or Subscription Access |
Request changes or add full text files to a record
Repository staff actions (login required)
View Item |