Chou, L. C., Chen, S. Y., and Yang, C. C. 2003. Valuation of Covered Warrant with Credit Risk. NTU Management Review, 14 (1): 263-289
Li-Chuan Chou, Department of International Business, National Taipei College of Business
Shen-Yuan Chen, Graduate Institute of Finance, National Chiao Tung University
Chau-Chen Yang, Graduate Institute of Finance, National Taiwan University
Abstract
There is no sufficient margin settlement mechanics for prevailing covered warrant in Taiwan, thus the credit risk of warrant issuer must be considered when investors evaluate the price of covered warrant. This paper applies Klein's (1996) vulnerable option valuation model to empircially study the difference among the theoretical value of vulnerable warrant, Black & Scholes option price and the market price of warrant by using the domestic warrant data. Furthermore, this paper also analyzes the impacts of main variables on the price of vulnerable warrant through sensitivity analysis.
Keywords
Warrant option Vulnerable warrant Credit risk Default risk