The Valuation and Hedging of Deferred Commission Asset Backed Securities
April 2000
Jacob Boudoukh, Patrick McAllister, Matthew Richardson, and Robert F. Whitelaw
ABSTRACT
Due to a timing mismatch between fee receipts and commission payments, there is a new and growing market for securities
backed by fees from back-end load and level load mutual funds. This paper develops a contingent claims methodology
for the valuation of these securities. 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.
Subject: Investments, Investments/Derivatives
Classification: Theoretical, Empirical
Jacob Boudoukh
Institution: Stern School of Business, New York University
Email: jboudouk@stern.nyu.edu
Telephone: (212) 998-0305
Home Page: http://www.stern.nyu.edu/~jboudouk/
Patrick McAllister
Institution: Constellation Financial Management
Matthew Richardson
Institution: Stern School of Business, New York University
Email: mrichar0@stern.nyu.edu
Telephone: (212) 998-0349
Home Page: http://www.stern.nyu.edu/~mrichar0/
Robert Whitelaw
Institution: Stern School of Business, New York University
Email: rwhitela@stern.nyu.edu
Telephone: (212) 998-0338
Home Page: http://www.stern.nyu.edu/~rwhitela/
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