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option on mutual fund
hi all, quick question, if anyone happens to know the answer..... if i was to write a vanilla option on a mutual fund should i book the management fees that the fund manager is charging as repos. my simplistic thought was that even if the fees are not been paid to me they are bringing the forward of my delta down so i should be reflecting that in the forward of the option by marking them as repos. have i the wrong end of the stick?any thoughts / views highly appreciated
option on mutual fund
This is like being long a stock where you don't have the right to the "dividend stream", but the stock still pays dividends. If by repos you mean something that decreases the forward value, then I think you are on the right track.
option on mutual fund
in theory, perhaps yes, in practice you cannot hedge the underlying because you will not know what the fund manager is going to buy/sell...the portfolio may change every day.
option on mutual fund
the hedging bit is irrelevant as to whether you book fees as repos. since you proxy hedge some aspects of a short MF option ie Vega, Divs etc now if part of the fees were coming my way as a rebate i think i shouldnt book them as a repo cause that will get the clients forward too low, but i could be booking them as a future cash flow. btw the purpose of all this is to evealuate fair value of a trade.anyone with experience on the matter, views/thoughts very much appreciated
option on mutual fund
In case some would like to follow-up on the matter, here is a good technical article:http://papers.ssrn.com/sol3/papers.cfm? ... titionners, please fell free to share your insights as the activity of 'options on mutual funds' may have changed a bit in the last few years (eg. for funding costs, diminished client demands,...).
Last edited by gpop on January 14th, 2013, 11:00 pm, edited 1 time in total.