The Effects of Different Volatility and Management Fee Dynamics on High Water Mark Option Pricing

Author

Tang, Jiuhong ; Yau, Stephen S -T

Author_Institution

Sch. of Bus., Southern Nasarene Univ., Bethany, OK

fYear

2006

fDate

13-15 Dec. 2006

Firstpage

6696

Lastpage

6701

Abstract

The purpose of this paper is to examine the impact of incentive scheme, including basic management fee (MF) and incentive fee (IF), on exotic option pricing. Since high water mark (HWM) is the benchmark usually employed by the incentive scheme of hedge fund industry, this paper develops the framework of HWM lookback option pricing in stochastic volatility models; option price is obtained through Monte Carlo (MC)simulation and variance reduction. In addition, stochastic MF dynamics are firstly applied in option model, and numerical examples show better model performance than that of deterministic MF model by hedging error tests

Keywords

Monte Carlo methods; incentive schemes; pricing; stochastic processes; Monte Carlo simulation; exotic option pricing; hedge fund industry; high water mark; incentive fee; incentive scheme; management fee dynamics; stochastic volatility models; Asset management; Brownian motion; Conference management; Filtration; Incentive schemes; Monte Carlo methods; Mutual funds; Pricing; Stochastic processes; USA Councils;

fLanguage

English

Publisher

ieee

Conference_Titel

Decision and Control, 2006 45th IEEE Conference on

Conference_Location

San Diego, CA

Print_ISBN

1-4244-0171-2

Type

conf

DOI

10.1109/CDC.2006.377042

Filename

4177055