# Model Uncertainty, Recalibration, and the Emergence of Delta-Vega Hedging

## TL;DR

This paper investigates how model uncertainty affects option pricing and hedging, showing that delta-vega hedging becomes optimal under small uncertainty aversion and deriving indifference price corrections based on option sensitivities.

## Contribution

It introduces a framework for dynamic recalibration of the Black-Scholes model under uncertainty, highlighting the emergence of delta-vega hedging as asymptotically optimal.

## Key findings

- Delta-vega hedging is asymptotically optimal with small uncertainty.
- Indifference price corrections depend on differences in option sensitivities.
- Recalibration to market prices influences hedging strategies.

## Abstract

We study option pricing and hedging with uncertainty about a Black-Scholes reference model which is dynamically recalibrated to the market price of a liquidly traded vanilla option. For dynamic trading in the underlying asset and this vanilla option, delta-vega hedging is asymptotically optimal in the limit for small uncertainty aversion. The corresponding indifference price corrections are determined by the disparity between the vegas, gammas, vannas, and volgas of the non-traded and the liquidly traded options.