Prices of derivative warrants considering their market characteristics and short-selling costs of underlying assets

We theoretically explain the empirical findings for prices of derivative warrants (DWs). For this, we consider the short-selling costs of underlying assets and the different features of DW such as unavailability of net short positions and existence of a liquidity provider. Accordingly, we explain the similarities and differences between DWs and options. The similarities include that the relative bid-ask spreads increase when the short-selling costs increase or the moneyness becomes out of the money. The differences include that DW prices tend to be higher than option prices and that the bid-ask spreads of DWs can be narrower than those of options.