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The Valuation and Hedging of Deferred Commission Asset Backed Securities

32 Pages Posted: 4 Nov 2008  

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship

Patrick McAllister

Lincoln Financial Group

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Date Written: April 2000

Abstract

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.

Suggested Citation

Boudoukh, Jacob and McAllister, Patrick and Richardson, Matthew P. and Whitelaw, Robert, The Valuation and Hedging of Deferred Commission Asset Backed Securities (April 2000). NYU Working Paper No. FIN-00-019. Available at SSRN: https://ssrn.com/abstract=1295222

Jacob Boudoukh (Contact Author)

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship ( email )

P.O. Box 167
Herzliya, 46150
Israel

Patrick McAllister

Lincoln Financial Group ( email )

Philadelphia, PA
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Robert F. Whitelaw

New York University ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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