To be fully hedged against a small change in the stock price’, doesn’t the delta only approach work well? Kindly explain clearly. Thanks.
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The vignette is stating fully hedge so we have to consider gama. And Delta is for Very small change in the stock price while Delta and Gamma is small change in stock price. Remember Although both of this are never used for large change in underlying price they are appropriate only for SMALL change.
-why?
Bcoz there is 3rd order effect and 4th order and so on is there.