American Warrants

Maybe more of a finance question, but I thought maybe someone here'd know how to do this:

I need to value American-style warrants, unknown dividend.

I already developed a European-style warrant valuation model, but American-style is a bit more difficult. Any suggestions? Cheers,

Peter1999

If it has no dividends it is the same price as the European option.
The difference between american and european option is that Europeen options will be exercised only at maturity and the US ones at any time...
There is no closed formula for this payoff... the easiest way is to use a binomial tree... have a look in Willmott forum... http://www.wilmott.com/index.cfm?NoC...=Yes&forumid=1

Thanks for the reply Pierre,

However, I do not understand fully why the price would be the same if no dividends would be paid. Let me clarify that the valuation needs to be done pre-IPO. I would say the value of the warrant would be a bit higher than an option, since the price of the underlying stock could, at a point before maturity, increase above exercise value, and drop afterwards. A warrant would capitalize this value, where a simple option would not...

Thanks in advance for any clarification.

Peter1999

Peter, a warrant and an option are the same thing in term of pricing... a warrant is just a kind of packaged option (one warant =100 single option fopr example...) to simplify the price (you would pay $2 instead of $0.02).
Otherwise, an in the money (ITM) call option on a stock is often exercised just before the stock pays a dividend which would lower its value by more than the option's remaining time value... so the pricing of this instrument is path dependant... it will be at each node is Max[Binomial Value, Exercise Value]. These 2 values are the same for a european option or if you use only a dividend yield instead of a discrete dividend timeschedule.

Hope it helps...