This paper demonstrates that warrant valuation and exercise strategy differ fundamentally from call option valuation. Simultaneous exercise of warrants is shown to be suboptimal and a monopolist owning all warrants can achieve a higher value. Unless warrants are perfectly divisible, no satisfactory equilibrium exists for the valuation and exercise of widely held warrants. The problems encountered appear to be quite general and stem from necessary assumptions about future corporate dividend policy and capital structure. Such assumptions are necessary for any model of corporate security valuation.

This paper analyses the distribution of returns on a hedged portfolio, consisting of a European call option and its associated stock, when the portfolio is rebalanced at discrete time intervals. Under the assumptions of the Black-Scholes model this distribution is particularly skew. In tests of the average return on a hedged portfolio this skewness leads to biased t-statistics. The paper explores the nature and extent of this bias and suggests procedures for overcoming it. Other aspects of discrete hedging are also discussed.