Warrants bond is one of innovative financial instruments on investment and financing markets in recent years. The traditional approach to model warrants bond is to copy the pricing theory of convertible bond. In this paper, theory is combined with practice in real life to compare the terms and conditions of warrants bond and convertible bond and it is found that there are many differences between those two bonds, including coupon, maturity, exercise price, put and call provisions and credit etc. Therefore, it is necessary to build a more suitable pricing model for warrants bond.
Learning from Tsiveriotis and Fernandes(1998), it is recognized that equity and debt components of warrants bonds are also subject to different default risk and derived a pair of coupled differential equations that can be solved explicitly. Basic value of warrants bond includes two parts, warrant's value and bond's value, where the latter is proved to be equivalent to a risk-free bond minus corresponding quantity put options. Dilution rate when conversing should be the dilution rate of equity ration. Besides, considering the domestic market still exists some investment restrictions currently, warrants bond is valued within the framework of structure models and a new pricing model is established under portfolio constraints in the markets. Based on those, contingent claims are modelled under this market hypothesis, and the assumptions of Black and Scholes(1973) pricing model is relaxed, introducing more realistic factors, studying warrants bond pricing problem under different market conditions in depth.
The pricing of warrants bonds which in unconstrained case is presented. The pricing of warrants bonds and investment portfolios under prohibition of short-selling and borrowing are discussed.
As portfolio constraints obviously exist in reality, it is meaningful to build such a structure model.It shows that the model not only can reflect portfolio constraints in the markets, but also can capture the real-time changes on financial lever of the company very well.
HU Chang-sheng, CHENG Zhi-fu, CHEN Jing, XIONG De-chao
. Pricing Warrants Bonds under Portfolio Constraints[J]. Chinese Journal of Management Science, 2017
, 25(9)
: 11
-18
.
DOI: 10.16381/j.cnki.issn1003-207x.2017.09.002
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