Optimal Dynamic Hedging of Equity Options: Residual-Risks, Transaction-Costs, & Conditioning (original) (raw)

This paper discusses an optimal dynamic hedging approach for equity options which accounts for residual risks, transaction costs, and conditioning information. Utilizing a General Auto-Regressive Asset Model (GARAM), the research explores how the interplay of return asymmetry and volatility impacts hedging strategies. It introduces the Optimal Hedge Monte-Carlo method (OHMC) for minimizing hedge errors and analyzes the effects of conditioning data on volatility trading strategies, aiming to maintain absolute portfolio risk profiles.