Modeling the price of hybrid equity warrants under stochastic volatility and interest rate

Authors

  • Roslan TRN School of Quantitative Sciences, College of Arts and Sciences, Universiti Utara Malaysia, 06010 Sintok, Kedah, Malaysia
  • Jameel AF School of Quantitative Sciences, College of Arts and Sciences, Universiti Utara Malaysia, 06010 Sintok, Kedah, Malaysia
  • Ibrahim SZ School of Quantitative Sciences, College of Arts and Sciences, Universiti Utara Malaysia, 06010 Sintok, Kedah, Malaysia

Keywords:

Equity warrants, stochastic, Cox-Ingersoll-Ross model, Heston model, hybrid models

Abstract

Previous studies revealed that most local researchers frequently used the Black Scholes model to price equity warrants. However, the Black Scholes model was perceived of possessing too many drawbacks, such as big errors of estimation and mispricing of equity warrants. In this work, we consider the problem of pricing hybrid equity warrants based on a hybrid model of stochastic volatility and stochastic interest rate. The integration of stochastic interest rate using the Cox-Ingersoll-Ross (CIR) model, along with stochastic volatility of the Heston model was first developed as a hybrid model. We solved the governing stochastic equations and come up with analytical pricing formulas for hybrid equity warrants. This provides an alternative method for valuation of equity warrants, compared to the usual practice of utilizing the Black Scholes pricing formula.

References

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Published

2024-02-26

How to Cite

Roslan, T. R. N., Jameel, A. F., & Ibrahim, S. Z. (2024). Modeling the price of hybrid equity warrants under stochastic volatility and interest rate. COMPUSOFT: An International Journal of Advanced Computer Technology, 9(03), 3586–3589. Retrieved from https://ijact.in/index.php/j/article/view/556

Issue

Section

Original Research Article

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