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The issue of multiple series of stock purchase warrants by the same firm is an interesting financial structure not just in America, but is common in countries such as Switzerland, Malaysia, and Singapore. This paper derives valuation formulas for multiple series of outstanding warrants. The theoretical warrant prices from this model are compared against existing models. We report a subtle slippage effect and also a cross dilution effect that cause the existing models, such as Galai-Schneller model, to be inappropriate for pricing such classes of multiple warrants. We also provide an example to illustrate the practicality of our model. The Greeks of the model are also derived in this paper. The complexity of multiple warrants could extend to other classes of contingent securities issued by the same firm but with differing expiry terms. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:517-534, 2003
(ProQuest Information and Learning: ... denotes formulae omitted.)
INTRODUCTION
Warrants are interesting derivative securities that are often issued as sweeteners in conjunction with other debt or equity securities. Sometimes, warrants may be issued in their own right.1 Quite importantly, it is common for a firm to issue more than one series of warrants at any one time. For example, in the United States, NASDAQ-listed RoweCom Inc. issued a series of 5-year warrants together with another series of Class A 1-year warrants in September 2000. In June 2000, NASDAQ-listed Saflink Corporation simultaneously issued three series of Class A 12-month, Class B 18-month, and Class C 24-month warrants. Other firms, such as Digital Lava Inc., commonly had two warrant series. In Europe, Nokia, the Finnish mobile phone company, issued a bond loan with warrants permitting different warrant series in 1995. In Switzerland, warrants are commonly issued as a means of corporate financing. InI 999, the Swiss Stock Exchange had over 1000 listed warrants from some 22 major firms. Some of these firms, such as Clariant and Ciba, have multiple stock warrant series. In Asia, warrants became very popular in the late 1980s and early 1990s. For example, in terms of market capitalization, warrants were the fastest growing securities in Indonesia in the mid1990s, though they accounted for only about 0.4% of total market value. In Thailand in 1999, there were 392 warrant listings...