Does model fit matter for hedging? Evidence from FTSE 100 options

This study implements a variety of different calibration methods applied to the Heston model and examines their effect on the performance of standard and minimum-variance hedging of vanilla options on the FTSE 100 index. Simple adjustments to the Black–Scholes–Merton model are used as a benchmark. Our empirical findings apply to delta, delta-gamma, or delta-vega hedging and they are robust to varying the option maturities and moneyness, and to different market regimes. On the methodological side, an efficient technique for simultaneous calibration to option price and implied volatility index data is introduced.