easy · FRM Part 1 Valuation and Risk Models
What is the primary reason that a delta-neutral hedge requires 'dynamic' rebalancing over time?
- The delta of the option changes as the underlying asset price moves (gamma).
- The underlying asset's volatility is constant, which forces the delta to drift.
- The exchange requires daily rebalancing to maintain margin requirements.
- The risk-free rate fluctuates daily, changing the present value of the strike price.
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