easy · FRM Part 1 Valuation and Risk Models
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.
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