Delta Hedging -> Risk Free Rate

CFA Level III Derivatives
#1

For the delta hedging, why it creates the risk free rate for the portfolio?

  1. Is it because the short call or short put position dealer has can collect the premium and invest in the risk free Treasury?

  2. Whenever there are more shares or less shares needed, people buy + finance at Rf or sell+invest at Rf. So I am guessing whenever the portfolio is rebalanced, the portfolio return will be not be exact equal to risk free rate because less return due to finance cost to buy more shares or the additional return by sell shares and investing at Rf, right?

Thank you!

#2

It creates Rf because you hedge your position.You need to rebalance because Δ changes with time and as S changes.Ignoring transaction costs you should earn something close to Rf. Check the book page 333-334