I'm trying to understand the section on hedging (see page 14 and 15 of the 2016 Course Notes). It states that an investor taking a short position on a forward contract can hedge its position by borrowing an amount of Ke^(-dT) and purchasing the asset at the spot price at time 0 (S0). d is supposed to represent the force of interest (because I have no idea how to put the relevant Greek letter into this post). I can understand that the "price" of the portfolio is -Ke^(-dT) + S0. However, it says that -Ke^(-dT) + S0 = 0 That I don't understand. Is it because we borrow the exact amount of money required to purchase the asset at time 0? I can see situations where values of K, S0 and d where that relationship simply cannot work. Appreciate any clarification!
