medium · FRM Part 1
What is the primary risk of using a 'Delta-Neutral' hedge for a short-option position without considering higher-order Greeks?
- Exposure to 'Gamma' risk, where a large price move changes the delta, causing the hedge to fail and potentially leading to massive losses.
- The risk that the clearinghouse will increase margin requirements for long positions.
- The risk that interest rates will move in the opposite direction of the stock price.
- The risk that the delta will become so high that the cost of rebalancing exceeds the portfolio's capital.
Sign up free to see the explanation and track your rank →
More FRM Part 1 practice
- According to the CAPM, which type of risk are investors compensated for bearing?
- What specific variety of liquidity risk is being described?
- How is 'Risk Capacity' distinguished from 'Risk Appetite' in a standard risk governance fr
- If a loan has a Probability of Default (PD) of 2.0%, an Exposure at Default (EAD) of $1,00
- If two portfolios have the same Sharpe ratio but one has positive skewness and the other h
- In a 'Liquidity Spiral', what is the primary channel by which market liquidity risk and fu
- In the context of the CAPM, what is the definition of 'Alpha' (α)?
- In the risk decomposition formula σ^2_i = β^2_i σ^2_M + σ^2_ε, what does σ^2_ε represent?