| High Water Mark (HWM) provision is an important feature in the hedge fund industry. The framework of the option pricing with HWM provision for hedge funds is developed in this paper. The closed forms of HWM lookback put option, Russian option and stoploss option are derived. We also obtain the internal relationship between HWM lookback put and the traditional lookback option. We show that HWM lookback put is cheaper than the traditional lookback put, and the higher the incentive fee, the lower the option price. |
