I have developed a keen interest in volatility strategies and have implemented various approaches based on practitioner delta. This delta is meticulously calibrated using a no-arbitrage implied volatility smoothing technique. While navigating this exciting domain, I have encountered a common challenge: how to effectively hedge against seemingly unhedgeable jump risks.
In my quest for understanding, I delved into literature, including Emanuel Derman's The Volatility Smile, Gatheral J.'s The Volatility Surface: A Practitioner's Guide, and the insightful work of Hyungsok Ahn and Paul Wilmott titled A Note on Hedging: Restricted but Optimal Delta Hedging, Mean, Variance, Jumps, Stochastic Volatility, and Costs.
The intriguing aspect of this exploration is the divergence of perspectives. Some sources contend that jump risks are inherently resistant to risk diversification, posing a formidable challenge. Conversely, others advocate for the adoption of jump-diffusion models as a viable solution.
I am wondering how do institutions manage jump risks, particularly for those hedge funds that sell health-care-sector options? Any comments are highly welcome.