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

•We calculate the theoretical bid and ask prices of derivative warrants (DWs) considering their specific features and short-selling costs of underlying assets.•DW prices tend to be higher than option prices.•DW bid–ask spreads can be smaller than option spreads.•The relative bid–ask spreads of DWs increase as they become out-of-the-money.•Short-selling costs increase the relative bid–ask spreads of DWs. 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.