bkballa

I don't think time decay has anything to do. A delta hedged portfolio is simply immune from small mkt fluctuations on a daily basis, so should earn rfr, which become the beanchmark for valuation

cityboy

Is the position like a covered call? If completely delta hedged or delta neutral, the future value should be known for certain and you should be hedged against down or up moves in the underlying.

When the future price is known, you get the present value by discounting at the risk free rate. As such, by holding the position until expiration you are earning the risk free rate.



Edited 1 time(s). Last edit at Monday, April 4, 2011 at 05:42PM by jmac01.

strikethree

way too many derivatives questions. You should be eating your meat and potatos.