The notes say that the equity principle of unit pricing fails when there is a bid/offer pricing system in place. Why is this the case? Isn't it the aim bid/offer pricing to ensure the equity principle?
The equity principle fails when an investor purchases units when the fund is growing and sells when it is contracting. On an Offer basis, the Offer price is the appropriation price plus a bid/offer spread. On a Bid Basis, the Bid price is the disappropriation(?) price less the bid/offer spread. By purchasing into a growing fund and selling out of a shrinking fund, the investor pays twice the bid/offer spread. This in itself doesn't contravene the equity principle, but the fact that it is caused by the actions of other unit-holders does (ie whether the fund is growing or shrinking)
Assuming there is no bid-offer spread on the appropriation and expropriation price, then in theory when one enters it should be at the appropriation price and when one withdraws it should be at the expropriation price. However (in practice) if the fund is expanding you could enter and withdraw at the appropriation price. Hence whether the fund is expanding/shrinking could affect the interests of policyholders. Am I correct in my understanding?
Your last point will affect the interests of the policyholders who enter or leave the fund - ie it will affect those who perform the transaction, by making them better or worse off, depending. But it will not affect the interests of those who don't buy or sell anything, and that is the point of the equity principle. (I think!)
But whether the fund is expanding/contracting will depend on the actions of other policyholders. So I think the equity principle is broken here?
