A Demonstrational Analysis On Warrant Pricing By Using Black-Scholes Model

It has been making great improvement in financial market of China over the past two decades,especially in its capital market. At the same time, there are many unsolvable problems in Chinesefinancial market comparing to the developed financial market. With the entry into WTO, it isnecessary for China to build up an open financial market with reasonable structure and variousproducts, so as to deal with the opportunity and challenge. Further financial innovation is in needfor Chinese financial market. The innovation of subscription warrant is especially important,because of its great significance for not only the reduction of state's stake and corporateadministration, but also for some financial deriving instruments such as convertible bond andstock option. Warrant has the functions of price-detection and risk-evasion, while it also has greatrisk of itself. Therefore, warrant should be treated with rational attitude and its real price should befixed according to scientific analysis. This paper will start with Black-Scholes' model of optionprice-fixed. It analyzes the pricing rationality and the risk of the warrant of China Marchants Bank.The result proves the applicability of that model in pricing of warrant. However, there is greatdifference between subscription warrant and call, this paper points out the problems ofBlack-Scholes' model and proposes suggestions. It hopes that Black-Scholes' model could berevised and applied for Chinese market better.