Many financial derivatives contain the provision of callable feature, especially in the convertible bond market. Warrants with the combination of early exercise feature and callable feature are also available in the financial markets. Therefore, the valuation of American callable derivative is a problem of theoretical as well as practical importance. This paper is to investigate the pricing and characterization of the American callable warrant. We mainly focus on examining the effects of the callable feature on the early exercise policy. Different callable conditions such as notice period requirement and partial recall provision are considered. Analytical pricing formulas and numerical scheme are also discussed. Moreover, we also observed some interesting phenomena such as the resemblan...[ Read more ]

Many financial derivatives contain the provision of callable feature, especially in the convertible bond market. Warrants with the combination of early exercise feature and callable feature are also available in the financial markets. Therefore, the valuation of American callable derivative is a problem of theoretical as well as practical importance. This paper is to investigate the pricing and characterization of the American callable warrant. We mainly focus on examining the effects of the callable feature on the early exercise policy. Different callable conditions such as notice period requirement and partial recall provision are considered. Analytical pricing formulas and numerical scheme are also discussed. Moreover, we also observed some interesting phenomena such as the resemblance between American capped call and callable American call and the resemblance among different numerical schemes.