The Effect Of Barrier On Warrant Pricing Based On CRR Model

In the early twentieth century, the world’s first warrant appeared in the United States. Due to its unique product designing and loosen terms, and high leverage and hedging characteristics, warrants have played actively in the financial derivatives markets. Research of warrants mainly focused on pricing, and modifying the pricing methods, but it is mostly based on BS model for improvement, or other proposed alternative models. The characteristics are that the formulas are complicated, and the parameters in the formulas are difficult to determine. Study of domestic scholars on warrants is more scarce, and mainly concentrated on the period of the warrants trading in China, and the methods used are relatively simple.To solve these problems, based on existing theory and related models, this paper obtain warrants pricing model with a barrier on the highly intuitive CRR model. Specific research follow these steps:Firstly, giving a detailed description of the concept of the warrants, barrier options and CRR model;Secondly, based on a CRR model and barrier options,and use the method of combinatorics, we obtain pricing model of the warrants with a barrier;Futhermore, a simulation study on the warrants pricing is provided to study the effects of barriers on warrants pricing; Finally, analyzing the sensitivity of the parameters in the model and to investigate the effects of different parameters on the warrants pricing.The main contributions of this paper are:On the basis of the CRR model,we price warrants with barrier options. Simulation results show that the various setting barriers have a different effect on warrants pricing.