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FINANCE / HEDGE FUNDS / RISK
MANAGEMENT 
Problem 
Hedge funds invest in privately traded securities whose
true value is obscured by many conflicting indicative prices estimated by a
small collection of broker dealers. 
Partners and Sponsors 
Capital Market
Risk Advisors (CMRA) and AdKap L.L.C. 
Challenge 
Come up with a system that allows a full extension of
standard financial tools to analyze these ‘translucent’ securities, while at
the same time incorporating the lack of a reliable price. 
Customized Toolkit 
For this problem we chose an approach using the risk
calculus of von Neumann  Morgenstern together with choices of functional
forms from probability theory (modified Gamma and Beta Distributions) and
ArrowPratt risk aversion. 
Solution 
Treat the blizzard of indicative prices as a source of
additional risk so that risk averse investors should
expect additional compensation as the prices spread out. Then use the
indicative prices as if they were a random sample from a probability
distribution governing the true price. Use the risk aversion of the investor
to discern a certainty equivalent in the form of a definite spot price of a
hypothetical liquid security. Because the spot price exists while the
equivalent liquid security does not exist, we called certainty equivalent the
phantom price. 
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your interests are related to this topic, please contact us at finance@ericweinstein.net. 

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