A hedge fund with net asset value of $71 per share currently has a high water mark of $78. Suppose it is January 1, the standard deviation of the fund's annual returns is 42%, and the risk-free rate is 4%. The fund has an incentive fee of 16%. a. What is the value of the annual incentive fee according to the Black-Scholes formula? (Treat the risk-free rate as a continuously compounded value to maintain consistency with the Black-Scholes formula.)
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