Sequential Warrant Exercise in Large Trader Economies
30 Pages Posted: 9 Mar 2008 Last revised: 20 Jun 2008
Date Written: September 2007
Abstract
It is well known that the sequential (premature) exercise of American-type warrants "may" be advantageous for large warrantholders, even in the absence of regular dividends, because using exercise proceeds to expand the firm's scale increases the riskiness of an equity share. We present sufficient conditions for the non-optimality of sequential exercise implying that for realistic interest rate levels even large warrantholders are better off not to exercise long before maturity. This result, however, does not justify in general the simplifying restriction that warrants or convertible securities are valued as if exercised as a block.
Keywords: Warrants, Large Trader, Sequential Exercise, Partial Exercise Option
JEL Classification: C72, G12, G13, G32
Suggested Citation: Suggested Citation