An investigation into the reasons for the pricing differences betweeen a warrant and an option on the same stock in the South African derivatives market

Jordaan, F. Y. ; Van Rooyen, J. H. (2010)

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This study set out to draw a pricing comparison between two similar contracts in the South African derivatives market. These contracts, a normal option and a warrant on the same underlying stock are considered. The research shows that although the two derivatives are the same in all respects, the premiums differ substantially when priced with the Black-Scholes-Merton model. It is clear that pricing has to take place over the same calendar period due to market changes when comparing the instruments. The Black-Scholes-Merton model was the proposed model to be used. However, due to certain limitations the Modified Black model was used as the best suited model. It was shown that warrant contracts always have a higher implied volatility and a higher premium than a comparable normal option per share of the same stock. These results were compared with similar studies conducted in the European markets.

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