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In optimiazation system, you have to weight the price for the different maturities in a way that reflect your confidence in each data point (influenced by liquidity). One way to do so is to weight, each price by its Black-Scholoes Vega (see Tankov (2003)). So when minimazing the squared differences of the sum your weighted option prices, you can use the ...


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The market does not follow Black-Scholes assumptions, as you clearly know : there is a skew and vol levels change. Neither does it follow any other particular known model. So when you say "dynamically hedge" you have to understand this as an approximate hedge that still leaves some significant risk. Vols will move, and not always together and in the way ...



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