Reinforcement Learning for Credit Index Option Hedging

Hedging consists in investing to reduce the risk of adverse price movements of financial instruments, and it is one of the main concerns in finance. In this paper we focus on the concept of option hedging, where an option is a contract which offers the buyer the opportunity to buy or sell the underlying asset at a predefined strike price in the future. In particular, the options considered here are credit index options i.e., the underlying is a Credit Default Swap (CDS) index. Option hedging is based on a mathematical theory started with Black & Scholes (B&S) (Black & Scholes, 1973). This theory is motivated by a strong set of assumptions which tend to be unrealistic (Yalincak, 2012).