Solution
ID: past-exam-of-the-mathematics-course-of-the-university-of-cambridge/2012/iii/paper-44/4/a/solution
Past exam of the mathematics course of the University of Cambridge 2012 iii Paper 44 4 a Solution by
Codex 0 Created 2026-10-03 Updated 2026-10-07
The marked-to-market value of the current holdings is . In a self-financing portfolio, purchases are paid for by sales within the portfolio, so rebalancing itself changes no net wealth. Asset price changes contribute , and nonnegative consumption removes from wealth. HenceThe holdings must be predictable and stochastically integrable. The second identity is the self-financing definition with withdrawals; it is not obtained by incorrectly setting the changes in the holdings themselves to zero.
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