Hi, The basic equity principle states: "the interests of unit-holders not involved in a unit transaction should be unaffected by that transaction". Doesn't the very use of a bid/offer basis contradict this? For example, a particular policyholder who is buying units will have a different unit price depending on whether other policyholders are buying (appropriation price) or selling (expropriation price). This doesn't seem too fair on such a policyholder? Is this what is meant by the core reading? "As will be explained below, in practice the creation or cancellation of other units can affect the price of a unit. Subject to this however, a company will wish to follow the above principle in its pricing." Thanks in advance.
Hi Mohammed On any given day there are three types of policyholder: policyholders buying units policyholders selling units policyholders holding units (neither buying or selling). The basic equity principle only applies to the last group. The idea is that by using a bid (offer) basis, the right amount of money is taken (added) to the fund so that the value of the units is unchanged for the policyholders holding not involved in the transaction. You are right that policyholders who are transacting (buyers and sellers) will be affected by whether it is a bid or offer basis. If they consider the price to be unfair then they could choose not to transact. Yes this is what it means by "the creation or cancellation of other units can affect the price of a unit" as if there are more (fewer) buyers than sellers the company will use an offer (bid) basis. Best wishes Mark
