Warrants
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Explain the following limits on the prices of warrants:
a) If the stock price is below the exercise price of the warrant, the lower bound on the price of a warrant is zero.
b) If the stock price is above the exercise price of the warrant, the lower bound on the price of the warrant is the difference between the stock price and the exercise price.
c) An upper bound on the price of any warrant is the current value of the firm's stock.
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Solution Summary
The expert explains the following limits of the prices of warrants.
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a) If the stock price is below the exercise price, then the person would be better off just buying the stock in the open market. Thus, nobody would want the warrant (just for the intrinsic value; there will be some time ...
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