Re-hedge more often, or pay less in trading costs?
Asked at SIG, Jane Street
You delta-hedge a long-gamma option book. If you re-hedge times over the option's life, your hedging-error variance falls roughly like , but each hedge costs a fixed amount, so total trading cost rises like .
Is there an optimal number of re-hedges? Roughly where does it sit?
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.