How Does the Cost of Hedging Affect the Premium Quoted in an RFQ?

The cost of hedging is directly incorporated into the option premium quoted by the market maker. Higher hedging costs, resulting from wider bid-ask spreads, high slippage, or expensive borrowing rates for shorting, lead to a higher premium for the option buyer.

This ensures the market maker maintains a positive expected profit margin after accounting for all transaction and risk management expenses.