Chrysler's Warrants: September 1983

Abstract

This case is a vehicle for discussing the theory and practice of option pricing. The three opportunities for option-pricing analysis are (1) valuation of the warrants proposed as an equity kicker to the government's loan guarantee as of May 1980; (2) evaluation of the economic fairness of the loan guarantee itself; and (3) valuation of the warrants again in September 1983.

Excerpt

UVA-F-0682

Rev. Jan. 3, 2022

Chrysler's Warrants: September 1983

We quietly asked the government to surrender the warrants to us at little or no cost. What a mistake! There was a huge uproar over our request.... I was furious....

—Lee Iacocca

The equity kicker that Congress insisted on is entirely consistent with the high risk [of saving Chrysler]. There is no reason for surrendering a penny of it.

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Keywords: financial policy, investment banking, option pricing, security analysis, valuation, warrants, Black-Scholes, Chrysler