Some corporations have issued perpetual warrants. Warrants are call options issued by a firm, allowing the warrant
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Some corporations have issued perpetual warrants. Warrants are call options issued by a firm, allowing the warrant holder to buy the firm’s stock.
a. What does the Black–Scholes formula predict for the value of an infinite-lived call option on a non-dividend-paying stock? Explain the value you obtain. ( Hint: What happens to the present value of the exercise price of a long-maturity option?)
b. Do you think this prediction is realistic? If not, explain carefully why. ( Hints: What about dividends? What about bankruptcy?)
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