A hedge fund with net asset value of $54 per share currently has a high water mark of $57. Suppose it is January 1, the standard deviation of the fund's annual returns is 40%, and the risk-free rate is 2%. 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 caiculations. 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

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
27
A hedge fund with net asset value of $54 per share currently has a high water mark of $57. Suppose it is January 1, the standard
deviation of the fund's annual returns is 40%, and the risk-free rate is 2%. 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.)
01:57:09
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
Transcribed Image Text:27 A hedge fund with net asset value of $54 per share currently has a high water mark of $57. Suppose it is January 1, the standard deviation of the fund's annual returns is 40%, and the risk-free rate is 2%. 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.) 01:57:09 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
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Investment Funds
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education