I understand all the calculation but dont understand the application. Its says delta hedge positions grow at risk free rate. So lets say a portfolio manager is long equity and thinks that next month is going to be bearish. So he might enter into a delta hedge to grow the portfolio at risk free rate rather then selling his equity. But why delta hedge? He can do the same things with futures/forward and dont have to think for a month. With delta hedge, he has to hedge constantly. Why bother with options Please explain?
Multiple tools. Its up to the hedger to choose which to use, depending on cost and convinience. If he is delta hedged using options , in the case you presented, he can still earn his upside after costs if the market goes up. He has down side protection.
GetsetGo, In delta hedging, the manager is short call. So he will not earn if the market goes up. It will offset against his long asset position
amit_cfa2: Its my mistake. I assumed its a hedge by buying a put. But long put + stock won’t erarn the riskfree rate. Can’t a manager delta hedge a stock position by buying puts (long puts) ?
Think about it this way. If you are not exposed to market risk (hedged) , there is no risk to be rewarded for and your assets grow at risk free rate.
Isn’t hedging with options more expensive then hedging with futures … if so, shouldn’t it give additional benefit interms of asymmetric payoff ? Any way …just my crazy thinking. Cheers 
There may be positions that have listed options, but not futures?
Schweser states that with the approaching maturity date, the delta and option value for the short call positions are declining; portfolio managers need to sell some shares of the underlying in order to maintain the well hedged status. I don’t understand this statement since the delta’s movements depend also on the moneyness of of the option. If the option is well in the money; then the delta actually increases with the shortened maturity.
lxwgh, I’ve not read that yet, but the point may be that delta and value of a *short* call is negative. So, as time passes, delta does decline but it’s going to -1 (say, from -0.8 to -1.0).
NO.This is not it. You could take a look at the book 5 Page 78. It says: Over time, the delta and (absolute) value of the short call position will fall. Other things equal, the manager can sell off shares of stock and invest the proceeds in a risk-free asset. This will lead to a risk-free rate of return over the life of the short-option / long-stock position.
lxwqh, Now that I look at Schweser, I think they just made a mistake. A call option does decline in value over time (as theta is always negative). But you’re right that the change in delta depends on whether it’s in or out of the money.