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How do you consider the dilution impact in the Black-Scholes
model when pricing a warrant that leads to the issuance of Can "turbo warrants" be priced using the
Black & Scholes model?
new shares if exercised?
How is a warrant dilution calculated?

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Scholes model for options pricing?
All related (19) Sort Recommended
How do you change the Black Scholes
model, or the binomial model, to model…
McCabe H.
Former member of NYSE · Author has 2K answers and 3.4M answer views · 3y
ad
Warrants are issued by a company to investors, expiring in 5 to 15 years. For public Ad

companies, warrants are more typically issued as a “teaser”. Warrants issued along with
common stock will result in a “unit”. The dilution impact for the first round of warrant funding
for a public company isn’t a huge difference, but there will be some dilution. However, there’s
no way to know today how many shares will need to be issued or how many shares will be
sold internally to those exercising their warrants.

With respect to models: there are extended forms of Black Scholes, particularly the dilutive
望月月餅款式包括奶黃、傳統及抹茶系列，更設有雜
BSM; you could use the Option Pricing Model or a Hull binomial model.
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In the case of a private company, the dilution effect of warrants will be equal to the number of
shares needed to issue in order to deliver shares to the warrant exercises. Patisserie... 開啟


A warrant on a private company will trade lower than a warrant on a public company,
with the assumption being that 100% of the stock will be issued.

The dilution effect will be the market value of the warrants (strike price * the number
of shares covering warrants) divided by the total market capitalization prior to
warrant issuance.

The value of a regular call option * number of shares / (number of share + number of warrant-
related shares) = approximate lower price due to dilution.

BEWARE: With a second round of warrant issuance be sure the warrant has provisions which
give the second round warrants some dilutive protection

Thanks for the A2A. Hope this is helpful and you enjoy the rest of your weekend.
800 views · View upvotes · View 1 share · Answer requested by Vidur Taneja

1 1

Aaron Brown
MBA in Finance & Statistics (academic discipline), The University of Chicago Booth School of Business
(Graduated 1982) · Author has 15.3K answers and 43.1M answer views · 2y

Related Has anyone come up with a better pricing model compared to Black-
Scholes for stock options?
Despite the name, Black-Scholes is not a pricing model. It’s a formula for converting option
prices into implied volatilities, much like we can convert bond prices into yields to maturity.
You don’t learn anything in either process, you just convert one number into a mathematically
equivalent number.

These translations are not useless. Converting bond prices into yields allows us to construct
yield curves, and study their evolutions; Black-Scholes allows us to construct volatility surfaces
and study their evolutions. We can take derivatives
Continue with respect to bond yields to get valuable
Reading
parameters
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Aaron Brown
MBA in Finance & Statistics (academic discipline), The University of Chicago Booth School of Business
(Graduated 1982) · Author has 15.3K answers and 43.1M answer views · May 19

Related How can I calculate a debt beta using the Black-Scholes option pricing
model if a company has several bonds?
I hope you know that Merton-model (or Black-Scholes) debt betas are generally not good
ways to estimate the sensitivity of debt value to equity value changes.

However if you want to calculate it, the usual practice is to use the total amount of debt—so
add all bonds together along with loans and other forms of debt. Whether it’s one credit
security or many doesn’t matter.

If you want to estimate separate betas for different instruments, the Merton model is no help.
You have to look at credit spread models based on seniority and maturity.
4

Aaron Brown
MBA in Finance & Statistics (academic discipline), The University of Chicago Booth School of Business
(Graduated 1982) · Author has 15.3K answers and 43.1M answer views · 1y

Related What are the limitations of the Black-Scholes model for options pricing?
The Black-Scholes formula converts implied volatilities to option prices and option prices to
implied volatilities. It’s a mathematical identity like converting a bond price to a yield-to-
maturity, or a yield-to-maturity to a bond price.

It can’t have any limitations in terms of what it does, it’s just a definition. It works perfectly all
the time.

Of course, there are things it can’t do. It can’t tell you which options are good buys and which
ones are good sells. It can’t tell you what the future will bring. It can’t cook and serve your
breakfast. If you want to call those limitations, fine.
Continue Reading
Bet
70 5 1

Stuart Smith
Author has 82 answers and 32.1K answer views · 2y

Related Can dividend payment be adjusted for in the Black-Scholes model?

Yes, if a dividend’s Due before expiry of the option, subtract the PV of the dividend from the
spot price.
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McCabe H.
Option Trader & former Floor Market Maker · Author has 2K answers and 3.4M answer views · 2y

Related What would it mean if I take a stock price at maturity for S0 in the Black-
Scholes formula?
In answer to your question, “What would it mean if I take a stock price at maturity for S0
in the Black-Scholes formula?” let me clarify what you mean by Price at maturity.

Do you mean if you place the forward price of the stock in the S0 (spot price of the asset)?

If so, then you’re going to throw off your results of the black-sholes model.

Look at the spreadsheet picture below. It shows an ATM option on a $65 asset (spot price)
expiring in 60 days. The cost to carry (interest rate) is 3.50%. The stock pays no dividend. I’ve
used a 31% implied volatility to price the option.

Continue Reading
 Continue Reading
On the left-hand side
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5 1 10

John Hwang
Former CFA, Exotics @ GS, Head Trader for VIX @ MS · Upvoted by Nicolas Leconte, MS Finance,
Paris Dauphine UniversityAuthor has 312 answers and 7.1M answer views · 6y

Related If Fischer Black and Myron Scholes traded options using their option
pricing model instead of publishing it, would they make a fortune?
I believe they could have made a killing.

Here's why I believe so.

If you read one of my favorite books, "The New Market Wizards" by Jack Schwager, there's
an interview done with (I think) Bill Lipschutz where he talks about how people traded options
in the 1980's.

Basically, during those times, people had the mentality of "If you like the stock, buy calls. If
you hate it, buy puts".

This suggests that a lot of traders paid little attention to implied volatilities of options (or was
not very systematic about it), and just used options as proxies to their views on the market
direction.
Continue Reading
In additi
46 15

www.strataprep.com
Head of Research & Design (2005–present) · Author has 72 answers and 43.7K answer views · 1y

Related Is the Black-Scholes model appropriate for option pricing?

It is!

But it is not the ONLY model.

Every model - and its output / “answer” - give the smart trader a sense of how the variables
stack up.

Add other insights - from other models.

You could get two outcomes:

1. A mathematical reality (Like B-S): then apply it! Thats what Algorithms do!

2. An insight: which is the difference between the man and the machine. This is what
great traders do!

McCabe H.
Former member of NYSE · Author has 2K answers and 3.4M answer views · 3y

Related I will calculate the theoretical value using Black-Scholes Model. How can I
find the options? Is it the average of ask & bid? What should I consider as my
strike price given that there are many strike prices within a day?
assuming you’re looking to create a historical of implied volatility

If you’re looking to measure the volatility for the expiration and strike, use the midpoint of the
bid and ask for both put and call (get the price of the straddle, the calculate the midpoint) of
the “closest to at-the-money” Strike Price.

The Reason here is that At-The Money options are the most active and thus still provide the
most robust opinion of IVOL.

I hope this answers your question, Thanks for the A2A and enjoy your evening.
2 1

Kevin McElroy
Over a decade working in financial research · Author has 616 answers and 833.4K answer views · 2y

Related What are three alternative models to the Black and Scholes model?
There are tons of ways to value options pricing. Black scholes is just a rigorous version that is
among the most useful. I’ll only discuss one in my answer:

The simplest is the intrinsic value model.

You just take the difference between the current price and the option’s strike price.
Search for questions, people, and topics Sign In
For calls, you subtract the strike price from the current price. For puts, you do the opposite,
and subtract the current price from the strike price.

Example: If you own a $100 call and the stock price is $101, your option’s per share intrinsic
value is $1.
Continue Reading
For a put, if you owned the $100 contract and the stock price

D. Mas
Options, Greeks, Volatility, Futures · Author has 427 answers and 539K answer views · 2y

Related How does the dividend yield of underlying assets affect the theoretical
price of an option according to the Black-Scholes model?
Ultimately theoretical price of a Put or a Call option is dependent on 6 factors. Stock price,
strike price, interest rate, time to expiry, dividend and implied volatility.

Dividend causes the stock price to adjust down by the equivalent amount. So it reduces prices
for Call options and causes price increases for Put options.
1

David Boyle
Studied Electrical Engineering (Graduated 1973) · Author has 1.3K answers and 449.7K answer views
· 1y

Related What is the Black-Scholes call price if a company has a stock price of $70
and a strike of $55 maturing in 5 months. The risk-free rate is 4%/year, the mean
return on the stock is 8%/year, and the standard deviation of the stock return is
50%/year?
Give me a company name, an option strike price and an option expiration date, and I will
calculate an option price for you, with all the details. It will be fair and accurate. I have a
calculator

John Roberts
Trading options for 10 years · Author has 154 answers and 26.7K answer views · 1y

Related What is the expected return of a “correctly” priced option if volatility

stays constant (options, option pricing, black scholes, quant)?
The price of the option will still be affected by theta and delta. Theta will cause price to fall
over time (by theta per day). Delta will cause price to fluctuate with the price of the underlying
(proportionally).

Both theta and delta will also change over time.

Happy trading!
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Related questions

Can "turbo warrants" be priced using the Black & Scholes model?

How is a warrant dilution calculated?

How do you price barrier options under Black-Scholes?

Are option pricing methods like Black Scholes ever used in Credit Risk models?

What are the limitations of the Black-Scholes model for options pricing?

How do you change the Black Scholes model, or the binomial model, to model stock prices
instead of option prices?

When does the company utilizes the proceeds from the issuance of share warrants?

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brownian motion, exotics, quant)?

What is the Black-Scholes call price if a company has a stock price of $45 and a strike of $50
maturing in 5 months. The risk-free rate is 4%/year, the mean return on the stock is 8%/year,…

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quant)?

How does the dividend yield of underlying assets affect the theoretical price of an option
according to the Black-Scholes model?

What is the process of dilution without issuing new shares?

Is the Black-Scholes model appropriate for option pricing?

Are the option valuation models viz Portfolio replication, option equivalent, Black & Scholes
etc practically applicable? Or are they just good on paper?

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