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arXiv · 1411.3947

Incorporating Views on Market Dynamics in Options Hedging

Antoine E. Zambelli
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Abstract

We examine the possibility of incorporating information or views of market movements during the holding period of a portfolio, in the hedging of European options with respect to the underlying. Given a fixed holding period interval, we explore whether it is possible to adjust the number of shares needed to effectively hedge our position to account for views on market dynamics from present until the end of our interval, to account for the time-dependence of the options' sensitivity to the underlying. We derive an analytical expression for the number of shares needed by adjusting the standard Black-Scholes-Merton $\Delta$ quantity, in the case of an arbitrary process for implied volatility, and we present numerical results.

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Antoine E. Zambelli. 2014-11-14. Incorporating Views on Market Dynamics in Options Hedging. https://arxiv.org/abs/1411.3947

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