The Valuation and Hedging of Deferred Commission Asset Backed Securities
32 Pages Posted: 4 Nov 2008
Date Written: April 2000
Due to a timing mismatch between fee receipts and commission payments, there is a newand growing market for securities backed by fees from back-end load and level load mutualfunds. This paper develops a contingent claims methodology for the valuation of thesesecurities. The resulting security value depends primarily on the current value of fund assets and the fee schedule. The valuation formula also provides an analytical expression for the appropriate strategy for hedging fluctuations in asset value. As a case study, we investigate the hedging performance of an institution that holds a portfolio of these securities.
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