Enhancing Deep Hedging of Options with Implied Volatility Surface Feedback Information

Since the advent of the Black and Scholes (1973) framework, dynamic hedging has become a standard financial risk management tool for managing the risk associated with options portfolios. The Black and Scholes (1973) framework has the remarkable property that delta hedging -a hedging strategy invested exclusively in the underlying asset and the money market account-achieves the perfect replication of a European-style contingent claim. In practice, this property is lost due to frictions. Most notably, considering the infrequent rebalancing of the hedging portfolio, classic delta hedging, which is inherently local, can no longer protect against infinitesimal shocks in the underlying asset price. Such an imperfect hedge inevitably yields a hedging error that has to be managed.