Attempted dynamic replication based valuation of equity options is analyzed using the Optimal Hedge Monte-Carlo (OHMC) method. Detailed here are (1) the option hedging strategy and its costs; (2) irreducible hedging errors associated with realistically fat-tailed & asymmetric return...

This paper compares two approaches to options: (1) Risk-Aware Approach, and (2) Risk-Neutral Approach. The risk-aware approach requires a probabilistic specification of the underlying’s returns, addressing higher than second moments, as hedging errors are singularly dependent on the excess...