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2020 Sep Q7

D

Darragh Kelly

Ton up Member
Hi,

Just want to clarify the last bit of acted sol Q7 (ii) of 2020 sept paper.

I follow the solution regarding the requirements for A to replicate B and the definition of a self financing portfolio. It's just last bit on putting the 2 above statements together. My understand is that because A is replicating B, and A is self financing, therefore any change in the value of porfolio B (ie value of derivative Dt), must be matched by a change in the value of portfolio A because we've said already its replicating it? ie that's why we can say dDt = at*dSt + bt*dCt?, it replicates/tracks the changes?

Thanks

Darragh
 
Last edited:
Yes, that's right. The components at and bt remain constant over the interval between t and t+dt and yet the value of the portfolio changes to match the value of the derivative.
 
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