Warrants are priced using the Black and Scholes option model used in international financial markets. This model finds a warrant price using variables such as the price of the underlying asset, strike price, days to maturity, volatility, interest rate and dividend expectations.
As the price of the underlying asset rises, the price of call warrants increases, while the price of put warrants decreases.
As the strike price increases, the price of call warrants decreases, while the price of put warrants increases.
As the number of days to maturity increases, the probability of the warrant becoming profitable rises, which increases the price of both call and put warrants.
As volatility rises, the probability of the warrants reaching their respective strike prices at expiration increases, raising the price of both call and put warrants.
As interest rates rise, the price of call warrants increases, while the price of put warrants decreases.
Changes in dividend expectations used in warrant pricing also affect warrant prices. For example, an increase in dividend expectations decreases the price of call warrants and increases the price of put warrants. On the other hand, since the dividend on the underlying asset is already accounted for in the warrant pricing on the payment date, the dividend-related change in the stock value does not cause positive or negative price movement for the warrants.
Direction | Call Warrant Price | Put Warrant Price |
|---|---|---|
Price of the Underlying Asset | ▲ Increases | ▼ Decreases |
Exercise Price | ▼ Decreases | ▲ Increases |
Interest | ▲ Increases | ▼ Decreases |
Volatility | ▲ Increases | ▲ Increases |
Days to Maturity | ▲ Increases | ▲ Increases |
Dividend | ▼ Decreases | ▲ Increases |
