Valuing Warrants using Black Scholes Formula: Solved Example
1. Context
In this video from FRM Part I curriculum (Valuation and Risk Models section), we describe warrants, calculate the value of a warrant and calculate the dilution cost of the warrant to existing shareholders. Warrants and Employee Stock Options offer similar rights as vanilla (European) call options, but also differ from these options in a few respects – the most notable one being that exercise of warrants / employee stock options leads to creation of new shares. This affects the cash flows of the firm and it’s capital formation. From shareholder’s perspective, it leads to a dilution impact which needs to be captured in the model used to capture these options. This video is extracted from the FRM Part 1 preparation course. The details of the reading in which this topic appears are given below:
| Area | Valuation and Risk Models |
| Reading | The Black Scholes Merton Model |
| Reference | Chapter 15. The Black-Scholes-Merton Model In GARP Official Books (FRM Part I, VRM section) (GARP, 2020). |