Understanding Warrants PricingA case study of the financial market in Spain

Résumé

Using non-arbitrage arguments, this paper investigates whether Spanish warrants trade under a fair price. Moreover, we look for possible explanations when arbitrage opportunities seem to be found. The analysis is twofold. On the one hand, price differences between traditional options and equivalent warrants are analysed. On the other, we also compare prices of warrants that have the same pay-off functions but are issued by different issuers. The results show that warrants are systematically overpriced with respect to options and also that an important portion of such price differences are related to the design of both market structures. Strikingly, depending upon the issuer, relative price differences between warrants are also found. These last differences are hardly justifiable but they seem to be related to who issues the warrant first in time.