Simulation-Based Pricing and Settlement Price Distributions of Indonesian Structured Warrants

Leopoldus Ricky Sasongko; Tundjung Mahatma; Robiyanto Robiyanto

doi:10.31764/jtam.v9i2.29282

Simulation-Based Pricing and Settlement Price Distributions of Indonesian Structured Warrants

Leopoldus Ricky Sasongko, Tundjung Mahatma, Robiyanto Robiyanto

Abstract

The Indonesian capital market has experienced significant growth, marked by the introduction of Structured Warrants (SWs) as innovative financial instruments. This study aims to develop a robust simulation-based pricing model for Indonesian Call SWs utilizing the Geometric Brownian Motion (GBM) framework and to determine their settlement price distributions. Monte Carlo simulations were employed to accurately capture the specific characteristics of Indonesian Call SWs, notably their average-price settlement mechanism and conversion rates. The results indicate that the settlement prices conform to a lognormal distribution, validating the GBM assumption and aligning with key trading metrics such as implied volatility, which is widely utilized in the Indonesian SW market. Additionally, the Symmetrical Auto Rejection rule, which imposes realistic constraints on underlying asset price movements, significantly enhances model realism and better reflects actual market conditions. The findings reveal that simulated Indonesian Call SW prices are slightly lower compared to values derived from the Black-Scholes model adjusted for conversion rates, highlighting opportunities for further refinement of pricing methodologies. Investors can leverage these insights to better assess risks and returns by anticipating volatility and price trends, with paying close attention to conversion rates and settlement mechanisms. Issuers may benefit from improved pricing accuracy, thus minimizing mispricing risks, while regulators can utilize this research to assess current market rules and design policies aimed at increasing market efficiency and transparency.

Keywords

Structured Warrants; Indonesian Capital Market; Settlement Prices; Geometric Brownian Motion; Monte Carlo Simulation; Lognormal.

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DOI: https://doi.org/10.31764/jtam.v9i2.29282