Question
A hedge fund with net asset value of $66 per share currently has a high water mark of $68. Suppose it is January 1, the
A hedge fund with net asset value of $66 per share currently has a high water mark of $68. Suppose it is January 1, the standard deviation of the funds annual returns is 55%, and the risk-free rate is 3%. The fund has an incentive fee of 20%, but its current high water mark is $68, and net asset value is $66. 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.)
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.)
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.)
d. Recalculate the incentive fee value for part (b) now assuming that an increase in fund leverage increases volatility to 65%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started