Title :
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
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;
Conference_Titel :
Decision and Control, 2006 45th IEEE Conference on
Conference_Location :
San Diego, CA
Print_ISBN :
1-4244-0171-2
DOI :
10.1109/CDC.2006.377042
