Risk free rate

LOS 30 e: Pg 201

Delta hedging a derivative position means combining the option position with a position in the underlying asset to form a portfolio, whose value does not change in reaction to changes in the price of the underlying over a short period of time. The value of that portfolio should grow at the risk-free rate over time, as it is dynamically managed.

Schweser book 4

LOS 29a Pg 140

It is also worthwhile to point out a basic relationship that underlies what we are doing when we replicate synthetic “cash.” We take a short position in futures to offset the risk in a long position in equity. This can be represented as follows:

synthetic risk-free asset= long stock- stock index futures (i.e., short position

Can anyone please explain what is the difference between both of the above techniques as the result is the same in both, which is risk free rate.

Thank you

difference is for the option position you pay a price to enter into the position up front to buy the option position (option premium).

so your risk free rate in teh option position obtained is actually after removing the option premium cost. to get risk free rate - you need a higher return on your position.