A Bond with Warrant (BW) is a hybrid security that has characteristics of an option as well as those of a bond. A BW consists of two securities which are a straight bond and an option, a warrant. A Warrant attached to a bond can be valued by traditional Black-Scholes option pricing model. But when an investor exercises the warrant, firm value will be diluted resulting in price change of an underlying asset, which may cause the distortion in pricing the contingent claim.
This thesis deals with solving the problem of changing the price of underlying asset due to exercising its own derivatives. Ingersoll’s PDE is represented to price the derivative having firm value as its underlying asset. Firm value as an underlying asset of a derivative can provide more reasonable price of its derivatives.
