Modeling the price of hybrid equity warrants under stochastic volatility and interest rate
Previous studies revealed that most local researchers frequently used the Black Scholes model to price equity warrants. However, the Black Scholes model was perceived of possessing too many drawbacks, such as big errors of estimation and mispricing of equity warrants. In this work, we consider the p...
Saved in:
| Main Authors: | , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
COMPUSOFT
2020
|
| Subjects: | |
| Online Access: | http://repo.uum.edu.my/27992/1/IJACT%209%203%202020%203586%203589.pdf http://repo.uum.edu.my/27992/ https://www.ijact.in/index.php/ijact/article/view/1125 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| Summary: | Previous studies revealed that most local researchers frequently used the Black Scholes model to price equity warrants. However, the Black Scholes model was perceived of possessing too many drawbacks, such as big errors of estimation and mispricing of equity warrants. In this work, we consider the problem of pricing hybrid equity warrants based on a hybrid model of stochastic volatility and stochastic interest rate. The integration of stochastic interest rate using the Cox-Ingersoll-Ross (CIR) model, along with stochastic volatility of the Heston model was first developed as a hybrid model. We solved the governing stochastic equations and come up with analytical pricing formulas for hybrid equity warrants. This provides an alternative method for valuation of equity warrants, compared to the usual practice of utilizing the Black Scholes pricing formula. |
|---|