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. |