M.J.: I carried out a few experiments of my own, and I've attached a few jpg's showing how the P&L is affected by misspecified hedge parameters. In all cases I used a call option with spot and strike = $100, risk-free-rate of 5%, a hedging vol of 20%, and time to maturity of 250 days with rebalancing every 5 days. The suffix on the figure indicates the realized vol, e.g. pl25 means a realized vol of 25%. Notice that the P&L becomes significantly skewed when the realized vol and hedging vol mismatch - but the skewness switches sign (as you may expect) as the underlier becomes more volatile relative to the hedging vol. One thing I find curious is even when the realized and hedging vol are identical the skewness is not identically zero - it's small but consistently negative (of course it does go to zero as the hedging frequency increases). Anyone have an explanation for this? - mayaro

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