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17 February, 23:57

A hedge fund with net asset value of $71 per share currently has a high water mark of $78. Suppose it is January 1, the standard deviation of the fund's annual returns is 42%, and the risk-free rate is 4%. The fund has an incentive fee of 16%. a. What is the value of the annual incentive fee according to the Black-Scholes formula? (Treat the risk-free rate as a continuously compounded value to maintain consistency with the Black-Scholes formula.)

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  1. 18 February, 00:31
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    Answer : The annual incentive fees according to Black Scholes Formular = 2.5

    Explanation:

    a) Find the value of call option using below parameter

    current price (st) = $71

    Strike price (X) = $78

    Rf=4%

    std=42%

    time=1

    value of call option=15.555

    Annual incentive=16% x 15.555=2.5

    The annual incentive fees according to Black Scholes Formular = 2.5

    (b) The value of annual incentive fee 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.)

    current price (st) = 71

    Strike price (X) = 78

    Rf = (e^4%) - 1 = 4.08%

    std=42%

    time=1

    value of call option=17.319

    Annual incentive=16% x 17.319=2.77
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