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

Johannes Muhle-Karbe (ETH Zürich)
Thursday, November 5, 2015 - 5:15pm
HU Berlin, Rudower Chaussee 25, Room 1.115

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)