[1.]

A hedge fund with $0.6 billion of assets charges a management fee of 2% and an incentive fee of 20% of returns over a money market rate, which currently is 6%. Calculate total fees, both in dollars and as a percent of assets under management, for portfolio returns of:(Enter your answers in millions rounded to 1 decimal place.)

Portfolio rate of Return [%] Total Fee [$ million] Total Fee [%]

a. -3 _____________ _____________

b. 0 _____________ _____________

c. 6 _____________ _____________

d. 12 _____________ _____________

[2.]

A hedge fund with net asset value of $74 per share currently has a high water mark of $79. Suppose it is January 1, the standard deviation of the fund's annual returns is 50%, and the risk-free rate is 5%. The fund has an incentive fee of 20%, but its current high water mark is $79, and net asset value is $74.

a.What is the value of the annual incentive fee according to the Black-Scholes formula?(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Annual Incentive fee _______________

b.What would the annual incentive fee be worth if the fund had no high water mark and it earned its incentive fee on its total return?(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Annual Incentive Fee _________________

c.What would the annual incentive fee be worth if the fund had no high water mark and it earned its incentive fee on its return in excess of the risk-free rate? (Treat the risk-free rate as a continuously compounded value to maintain consistency with the Black-Scholes formula.)(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Annual Incentive Fee ______________

d.Recalculate the incentive fee value for part(b) now assuming that an increase in fund leverage increases volatility to 60%.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Annual Incentive Fee ______________

[3.]

A hedge fund charges an incentive fee of 10% of any investment returns above the T-bill rate, which currently is 1.0% but is subject to a high water mark. In the first year, the fund suffers a loss of 5.5%. What rate of return must it earn in the second year to be eligible for an incentive fee?(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Rate of return _____________ %