A manager conducts a delta hedge on a written put position using the underlying
ID: 2806383 • Letter: A
Question
A manager conducts a delta hedge on a written put position using the underlying asset can:
earn the risk-free rate.
earn zero return since the portfolio value does not change over time.
earn extra “dividend” income on a given position.
place a floor on the position while leaving the potential for upside risk.
earn the risk-free rate.
B.earn zero return since the portfolio value does not change over time.
C.earn extra “dividend” income on a given position.
D.place a floor on the position while leaving the potential for upside risk.
Explanation / Answer
SInce the written put position has been delta hedged, the net gain or loss of the portfolio is close to 0 as our hedge keeps changing as the delta of the underlying changes.
Hence b.) earn zero return since the portfolio value does not change over time