Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. Join them; it only takes a minute:

Sign up
Here's how it works:
  1. Anybody can ask a question
  2. Anybody can answer
  3. The best answers are voted up and rise to the top

A rights issue is the granting by a corporation to its shareholders of a right to purchase $N$ new shares for each $M$ shares they already hold at a (often discounted) price $K$. Thus, it superficially resembles a call option, but because every shareholder is holding such options, dilution of the stock value is unavoidable. Are there any papers out there which would contain a description of a risk-neutral valuation of rights issue, e.g. using a modified Black-Scholes model?

share|improve this question

I think Hull treats dilution in his book, and it's extensible to this case. For what it's worth, the strike is typically set low enough that there's little doubt about exercise, meaning there's not much point in modeling the optionality. Most people concentrate on the dilution alone -- particularly the question of the change in fully diluted versus undiluted shares outstanding.

share|improve this answer

Your Answer


By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.