Physical Sciences and Mathematics Commons^™

Delta Hedging Of Financial Options Using Reinforcement Learning And An Impossibility Hypothesis, Ronak Tali

All Graduate Theses and Dissertations, Spring 1920 to Summer 2023

In this thesis we take a fresh perspective on delta hedging of financial options as undertaken by market makers. The current industry standard of delta hedging relies on the famous Black Scholes formulation that prescribes continuous time hedging in a way that allows the market maker to remain risk neutral at all times. But the Black Scholes formulation is a deterministic model that comes with several strict assumptions such as zero transaction costs, log normal distribution of the underlying stock prices, etc. In this paper we employ Reinforcement Learning to redesign the delta hedging problem in way that allows us …