We study option pricing and hedging with uncertainty about a BlackScholes 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.

EB00000003666K

Available