Hedge Fund Risk Premium Calculation by Wang Transform

1
Hedge Fund Risk Premium
Calculation by Wang Transform

• International AFIR Colloquium 2003
• YAMASHITA, Miwaka, CFA
• Tokio Marine Financial Solutions Ltd.

2
Contents

• Pricing the Hedge Fund Performance Derivatives
• The Idea for the Pricing
• Idea
• Review of Wang Transform
• Actual Examples
• Fat Tail Issues
• Extreme Value Indicator

3
Pricing the Hedge FundPerformance Derivatives

• Risk Premium Calculation Principle

C

premium



m


average of losses


s



standard deviation of losses



k

multiplier.


4
Pricing the Hedge FundPerformance Derivatives

• No Arbitrage Free Condition
• No Equilibrium Pricing Method
• No Clear Risk Measure

5
The Idea for the Pricing

• Idea Use Wang Transform

6
The Idea for the Pricing

• Review of Wang Transform
• Capital Market Line
• Black-Scholes Option Pricing Model
• Esscher Transform
• Coherent Risk Measure
• VaR, Tail VaR

7
The Idea for the Pricing

• Other Discussion

8
Actual ExampleRisk Premium Adjusted Price
9
Actual ExampleRisk Premium Adjusted Price
10
Actual ExampleFat Tail Issues
11
Remarks

• Risk Management and Risk Pricing
• Loss Probability
• No Risk Measure, No Equilibrium Pricing