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Options on Hedge Funds under the High Water Mark Rule

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Date
2005
Publisher city
Paris
Publisher
Université Paris-Dauphine
Link to item file
http://hal.archives-ouvertes.fr/hal-00012382/en/
Dewey
Probabilités et mathématiques appliquées
Sujet
Options on hedge funds; High-water mark; Local time; Excursion theory
JEL code
G10
URI
https://basepub.dauphine.fr/handle/123456789/3170
Collections
  • DRM : Publications
Metadata
Show full item record
Author
Atlan, Marc
Geman, Hélyette
Yor, Marc
Type
Document de travail / Working paper
Item number of pages
27
Abstract (EN)
The rapidly growing hedge fund industry has provided individual and institutional investors with new investment vehicles and styles of management. It has also brought forward a new form of performance contract: hedge fund managers receive incentive fees which are typically a fraction of the fund net asset value (NAV) above its starting level - a rule known as high water mark. Options on hedge funds are becoming increasingly popular, in particular because they allow investors with limited capital to get exposure to this new asset class. The goal of the paper is to propose a valuation of plain-vanilla options on hedge funds which accounts for the high water market rule. Mathematically, this valuation leads to an interesting use of local times of Brownian motion. Option prices are numerically computed by inversion of their Laplace transforms.

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