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#1
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Re: Valuing warrants
warrant is just a call option... any fees associated with the fund can basically be treated as dividends, because a dividend hurts the value of a call option, the same way fees would. you have to estimate the future volatility of the stock (just estimate the one standard deviation daily move of a stock and multiply it by sqrt(252)) and plug that into one of the many option calulators on the internet. For the dividend yield just use the fee (so 2% approx) and add any other dividends the fund might collect.
The reason a dividend is bad for a call option is that the stock will decrease by the dividend but since you are not an owner of the stock you do not receive the dividend... So the stock just goes down. Understanding options is not something that can be explained to you on a forum, read option pricing and volatility. |
#2
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Re: Valuing warrants
[ QUOTE ]
warrant is just a call option... [/ QUOTE ] if there's a significant amount of the warrants outstanding, so that they can cause significant dilution when exercised, pricing them as "just a call option" would be incorrect. |
#3
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Re: Valuing warrants
fair point... I had the impression that if the stock price shoots up and the company knows warrants will be exercised, they will generally buy back stock to prevent dilution? still I think you are best off approaching this problem treating the warrant as a call option and then adjusting...
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#4
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Re: Valuing warrants
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fair point... I had the impression that if the stock price shoots up and the company knows warrants will be exercised, they will generally buy back stock to prevent dilution? still I think you are best off approaching this problem treating the warrant as a call option and then adjusting... [/ QUOTE ] yes, you'd price the the same way as a call option, but you'd have to make the applicable adjustments. (and realize that you'd have to make similar adjustments on regular call options if the strike prices and maturities are such that the exercising of warrants will matter) as for buybacks, it doesn't really make a difference. if the warrants are exercised at $15 when the stock price is at $20, the company can only buy back 3 shares for every 4 new ones it has issued. |
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