justin88

I think this is a dynamic (delta) hedging, as stated on p.456~464 of cfai text vol 5. The stock position is replaced by bond position here.

Bond price rises => Bond position : Gain, Call : Loss
Bond price falls => Bond position : Loss, Call : Gain

Gain/Loss will offset only for a SMALL change in underlying (bond) price. So, a large change in bond's price can not be hedged away by this hedge due to gamma effect.