Optimal exercise strategies for corporate warrants

In this paper, we analyse the optimal exercise strategies for corporate warrants issued by levered firms. For the analysis, we distinguish between two exercise variants, namely the traditional block exercise and competitive exercise in equilibrium. We find that the optimal exercise date under the block condition can be before or after an optimal exercise in equilibrium. Surprisingly, optimal block exercise can occur even without any dividend payments in contrast to the competitive exercise. As a consequence, the asset values and the stock volatility under block exercise fundamentally deviate from those under the competitive exercise variant. Moreover, the value of a warrant in the block case and its exercise strategy do not coincide with those of a corresponding call option which contrasts with the assumption of ‘option-like’ warrant valuation.