PRICING OF LOCAL WARRANTS

Abstract

Many articles have been written in the local newspapers about the difficulty of understanding warrants. What appears to be lacking has been a method of pricing warrants. This study attempts to adapt the existing methods used for pricing options, in particular, the Black-Scholes method, to the pricing of local warrants. As survey of local warrants was carried out and only pure warrants issued together with rights issues of new shares were studied. The Black-Scholes method gave very accurate estimates of the actual traded price of the warrants for Chuan Hup Holdings Limited, while it consistently underestimated the traded price of Marco Polo's and Hotel Tai Pan's warrants. One key factor appeared to be the estimate of the volatility of the stock used in the Black-Scholes formula - the 'historical variance' calculated is not really a good estimate of the future volatility of both Hotel Marco Polo and Hotel Tai Pan shares, as both companies have undergone major restructuring before the period of study. Another is that of active trading versus thin trading and the assumption of continuous trading in Black-Scholes formulation. Further research is needed to examine some of the anomalies observed in this research.