• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

CT8 September 2011 Question 4

B

Brett Kim

Member
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.
 
You must log in or register to reply here.
Back
Top