The Emergence of Delta-Vega Hedging in the Black-Scholes Model

5. November 2015
Research Seminars
Rudower Chaussee 25, Room 1.115, 5 p.m.
Johannes Muhle-Karbe (ETH Zürich)
We study option pricing and hedging with uncertainty about a Black-Scholes reference model. For dynamic trading in the underlying asset and a liquidly traded vanilla option, delta-vega hedging is asymptotically optimal in the limit for small uncertainty aversion. The corresponding price corrections are determined by a number of second-order greeks, namely the option’s gamma, vanna, and volga.
(Joint work with Sebastian Herrmann)


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