A manager conducts a delta hedge on a written put position using the underlying

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.

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.

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

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