“Delta-hedged portfolio will earn a risk-free rate of return over time”. The portfolio is like a covered call. Is it due to time decay?
way too many derivatives questions. You should be eating your meat and potatos.
I don’t think time decay has anything to do. A delta hedged portfolio is simply immune from small mkt fluctuations on a daily basis, so should earn rfr, which become the beanchmark for valuation
Is the position like a covered call? If completely delta hedged or delta neutral, the future value should be known for certain and you should be hedged against down or up moves in the underlying. When the future price is known, you get the present value by discounting at the risk free rate. As such, by holding the position until expiration you are earning the risk free rate.
The short calls are not completely covered in a delta-hedge. Thanks for the explanation.
Yes they are. In a delta hedge, if the stock goes up by 1USD, the calls will go down by 1USD*delta (assuming the dealer is short). So overall the change in value of the portfolio is zero.
What if the stock goes down and the call is out of the money.
actually, i dont even think the change is zero in your example.
@ jmac01, have you read the chapter about options for level3?
Another question. The discussion in the book is for at-the-money or near-the-money calls. Can the dealer sell out-of-the-money or in-the-money calls? Or Should they as the dealers? If yes, the delta of in-the-money call could increase over time.
deriv108 Wrote: > Can the dealer sell out-of-the-money or > in-the-money calls? Or Should they as the dealers? > If yes, the delta of in-the-money call could > increase over time. Why not? As you learned in level II, dealers need to dynamic hedging all the time when they do delta hedge (there are special softwares for that).
“Yes they are. In a delta hedge, if the stock goes up by 1USD, the calls will go down by 1USD*delta (assuming the dealer is short). So overall the change in value of the portfolio is zero.” Delta is between 0 and 1. so, the delta must be 1 for the net change to be zero - meaning you are deep in the money. In that case, you may be delta neutral. right?
@ Jmac01. I don’t understand why you keep asking those kind of question on the forum when you can quickly open the book and get the answer. It looks like that: 1 - You have not read the chapter about options in level 3 2 - You have not passed level 2 because delta hedging is explained there Which one is it?
I am not asking a question. Simply stating what I believe the answer to be and asking if you agree (since you were incorrect). May be getting lost in translation - guessing English may not be your first language. And Level 2 was a breeze.
jmac01 dont hurt him brother.
jmac01 Wrote: ------------------------------------------------------- > I am not asking a question. Simply stating what I > believe the answer to be and asking if you agree > (since you were incorrect). May be getting lost > in translation - guessing English may not be your > first language. > > And Level 2 was a breeze. Yes I have heard that the 4th time you take level 2 it’s a breeze. Your English must not be your first language because you obviously cannot understand the material. Go back and read level 2 books please.
Real Name: michele panzeri Posts: 308 Date Registered: Friday, August 29, 2008 at 09:09AM 2008? Looks like you are the one who failed a level.
Registration date is not an indication whether you took the exam in that year or not.
no catfighting on the L3 forum please.