A hedge fund with net asset value of $76 per share currently has a high water mark of $80. Suppose it is January 1, the standard deviation of the fund's annual returns is 35%, 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.) 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 retur (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 45%. (Do n round intermediate calculations. Round your answer to decimal places.) Annual incentive fee
A hedge fund with net asset value of $76 per share currently has a high water mark of $80. Suppose it is January 1, the standard deviation of the fund's annual returns is 35%, 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.) 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 retur (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 45%. (Do n round intermediate calculations. Round your answer to decimal places.) Annual incentive fee
Chapter1: Making Economics Decisions
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Transcribed Image Text:Problem 20-13 (Algo)
A hedge fund with net asset value of $76 per share currently has a high water mark of $80. Suppose it is January 1, the standard
deviation of the fund's annual returns is 35%, 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.)
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 45%. (Do not
round intermediate calculations. Round your answer to 2 decimal places.)
Annual incentive fee
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