A closed-form approximation for valuing European basket warrants under credit risk and interest rate risk

Over the past few years, many financial institutions have actively traded basket warrants in the over-the-counter market. Prior research has proposed an approach to valuing single-stock options subject to credit. However, this approach cannot be applied directly to the case of basket warrants. Using the martingale method, we propose a closed-form approximation for valuing European basket warrants using a continuous-time model, with credit risk and interest rate risk considered simultaneously. Finally, several numerical examples are utilized to demonstrate the characteristics of basket warrants under credit risk.