I dont really understand the position held in portfolio B. In the answers given in the revision notes it says portfolio B holds exp(xT) tonnes of the asset and the management fee can be paid off by selling off xdt tonnes of the asset. So what exactly is the purpose of the short cash position given that Portfolio B already contains the asset to be sold at time T? And why is the borrowed amount y*exp(x*(T-0.5)-0.5*r)?
Hi The aim of portfolio B is to match the value of portfolio A at time T. The short cash position is required so that when it grows at the risk-free rate the two portfolios have the same value. There's more information in this earlier post. Let me know if that doesn't help.
