Decomposing a Warrant into a Share Option and a Compound Option

Summary

The document asks how to value a European warrant that delivers both one company share and one warrant on the same company. The suggested approach separates those two entitlements: value the share component as a standard call option and the additional warrant as a compound call option, then add the component values. The Black–Scholes call formula is identified as a familiar method for the first component, while compound option valuation is pointed to as a separate research area for the second.

This decomposition clarifies the structure of the claim, but the document does not provide a complete valuation formula or numerical example. It leaves the compound option method unspecified and does not state the contract terms, such as the underlying warrant’s strike, maturity, or exercise conditions. Those details, along with the assumptions used for the stock and option valuation, would be needed to implement the approach. The response is therefore a useful framing of the problem, rather than a ready-to-use pricing model.

Key ideas

• The warrant’s payoff can be viewed as a share call plus a warrant represented by a compound call.
• The share component can be valued using a standard Black–Scholes call framework.
• The warrant component requires a compound option valuation approach.
• The document identifies the decomposition but does not specify a full model or the contract inputs.

Tags

# Valuing a warrant on a warrant


# Valuing a warrant on a warrant












How would you go about valuing a European warrant that entitles you to a) 1 share of a company and 2) 1 warrant on that same company?

## Answer by emcor (score 7, accepted)

https://quant.stackexchange.com/a/12961

You are essentially dealing with two options:

$EU\,{Warrant}(S_t) = BlackScholesCall(S_t)+CompoundCall(S_t)$

The Black-Scholes formula is known, and Compound Option pricing has various approaches in research which you may find.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.