Key Factors that Determine a Warrant Price

Date: August 14, 2017

The price of a warrant is derived using option pricing models such as the Black-Scholes. There are six factors that affect a warrant price. The effects of each factor on both call and put warrants are detailed below

Key Factors

Change in Warrant Price

Explanation

Call

Put

Underlying Asset Price Increases

An upside movement in the underlying asset makes a call warrant more valuable and a put warrant less valuable.
Exercise Price of Warrant Increases

A high exercise price reduces the probability of a call warrant being exercised and increases the probability of a put warrant being exercised.
Implied Volatility of Underlying Asset Increases

The higher the price fluctuation of the underlying asset, the greater the potential for the structured warrant to trade in-the-money.
Lifespan of Warrant Decreases

The value of a warrant declines as the warrant’s lifespan becomes shorter.
Divided Yield of Underlying Asset Increases

Cash payments on the underlying asset tend to decrease the value of a call warrant because it makes it more attractive to hold the underlying asset than the optionality.
Interest Rates Increases

Interest rates affect a warrant price through the holding costs of buying the underlying assets to hedge the warrants sold. As interest rate increase, the value of the call warrant increases and the value of the put warrant decreases.