Pricing Call Warrant by Using Trinomial Model and Historical Volatility

Abstract

Warrant is one of the financial instruments providing assistance to investors as a security hedging that authorizes the holder in buying or selling underlying stock of the issuing company at a certain amount, price, and time. Trading warrant is a risky investment since the company must know the appropriate price, while the broker equally needs to have knowledge about warrant due to the price, which tends to be undervalued or overvalued during the pricing process. In this study, the trinomial model is adopted as an extension of the binomial model. The objective of this research is to study trinomial model and historical volatility in pricing call warrant and compare the warrant model price with the actual price. The relative pricing error is calculated for valuation of the warrant price, and moneyness is calculated to identify whether the price is reasonable for investors to buy the underlying shares.