Interlocking Global Business Systems: The Restructuring of Industries, Economies and Capital Markets

By Edward B. Flowers; Thomas P. Chen et al. | Go to book overview

Bear Stearns could initiate privately negotiated transactions with institutions by (1) taking positions in dollar or Hong Kong currency forward contracts, (2) taking positions in dollar or Hong Kong currency spot contracts, or (3) arranging currency swap agreements.


SUMMARY

The Hong Kong warrants represent another exchange-traded derivatives that allow U.S. investors to hedge or speculate on the price movements in the Hong Kong stock market. Understanding the pricing behavior of this new security will definitely provide valuable information to investors as well as issuers in assessing their potential benefits and costs.

As Hong Kong warrants are exchanged-traded options on a HK$- denominated stock index, the valuation of these securities is dependent upon a complex set of factors. We extend Dravid, Richardson and Sun's [5] European dollar-denominated option model to allow for early exercise based on Barone- Adesi and Whaley's [1] approach. The empirical results reveal that the Barone- Adesi and Whaley's model seems to be very effective in pricing Hong Kong warrants when the implied volatility is employed.


NOTES

K. C. Chen is Theodore F. Brix Professor of Finance at California State University, Fresno.

1.
Upon exercise, the warrant holders have the option to specify that their warrants are not to be exercised if: for HKC, HKP, HKS, HCW and HPW, if the spot price on the valuation date is 20 or more points below (for calls) or above (for puts) the closing index level on the exercise date; for MHK, the spot price on the valuation date is ten or more points below the closing index on the exercise date; and for HXC, HXP and SYP, the spot price on the valuation date is five percent or more below (for calls) or above (for puts) the closing index level on the exercise date. MHW does not have a limit option.
2.
During the sample period, the mean and standard deviation for the Hong Kong 90-day interest rate was 4.16% and 0.55%, respectively.
3.
The cost of dedging would be higher when using call options because of time premium. However, marking-to-market would be inevitable when using HSI futures.

REFERENCES

Barone-Adesi G. and Whaley R. E. ( 1987), "Efficient Analytic Approximation of American Option Values," Journal of Finance, Vol. 42, pp. 301-20.

Black F. and Scholes M. ( 1973), "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, Vol. 81 (May/June), pp. 637-59.

Brennan M. J. and Schwartz E. S. ( 1977), "The Valuation of American Put Options," Journal of Finance, Vol. 32, pp. 449-62.

Chen K. C., Sears R. S., and Shahrokhi M. ( 1992), "Pricing Nikkei Put Warrants: Some Empirical Evidence," Journal of Financial Research, Vol. 3, pp. 231-51.

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