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Investment / Financial Markets Old Exam MFE Forum 

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#1




these damn signs are confusing me...
I'm just doing questions again re arbitrage etc.
+ means positive cashflow, right? and  means negative, so selling somehting means you get the cash so it's a + (right?) and borrowing means you also get the cash, so also a +, (right?) but then in the replicating portfolio models,  means borrowing? and + means buying? I keep messing up these questions and can't get this straight. I can do the math, but the verbally interpretting is where I get confused. Sorry for such a stupid question... 
#2




I get confused on these sometimes too, but the way that I have been remembering it is as follows:
In general, we replicate the option by buying delta shares of underlying stock, and lending the amount B at the risk free rate. So, if we have a negative B, we are lending a negative amount, which is borrowing. If we have a positive B, by the definition above we are lending money. Similarly, if we have a negative delta, then we are buying a negative amount which is selling. If we have a positive delta then by the definition above we are buying. I am not sure if you have the Coaching Actuaries manual, but they do a pretty decent job of explaining this in their videos on the topic. Your statements about cashflows above were all correct, to the best of my knowledge. I kind of just think as replicating portfolios as a different rule of thumb than the cashflow profit problems. I hope this helps!
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#3




The way that worked out for me:
We consider two perspectives  Value/Price Perspective and Cashflow Perspective. In Value/Price Perspective  longing assets (+); Shorting assets () In Cashflow Perspective  longing assets () ; Shorting assets (+) Once I read the question, I am generally able to figure out which of the above two perspectives, I want to use! 
#5




Elasticity would be cashflow perspective. I just solved a question on this today. It was something about the elasticity of the portfolio.
Since I knew I was dealing with a portfolio and elasticity formula takes into consideration weights, it made more sense to me to use cash flow perspective. Not sure if this would be helpful... worked for me though! 
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