ATTEND THE QUESTION ONLY IF YOU CAN SOLVE BOTH THE QUESTIONS. AWARE OF CHEGG POLICIES SO DO NOT SAY ONLY ONE CAN BE DONE.

ANSWER BOTH OR MAKE WAY TO OTHERS TO ANSWER.

WILL REPORT THE ANSWER IF ONE IS ANSWERED.

A hedge fund with net asset value of $72 per share currently has a high water mark of $74. Suppose it is January 1, the standard deviation of the funds annual returns is 30%, and the risk-free rate is 3%. The fund has an incentive fee of 20%.

Required: 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 40%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A hedge fund with net asset value of $72 per share currently has a high water mark of $74. Suppose it is January 1, the standard deviation of the funds annual returns is 30%, and the risk-free rate is 3%. The fund has an incentive fee of 20%.

Required: 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 40%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A hedge fund with net asset value of $72 per share currently has a high water mark of $74. Suppose it is January 1, the standard deviation of the funds annual returns is 30%, and the risk-free rate is 3%. The fund has an incentive fee of 20%.

Required: 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 40%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)