How Does Transaction Cost Affect the Frequency of Delta Hedging?
Transaction costs impose a penalty on frequent trading. A market maker must balance the risk reduction from re-hedging (lower gamma risk) against the cost of the trade (higher transaction costs and slippage).
Higher transaction costs lead to less frequent re-hedging, resulting in a wider 'neutral band' for delta, where the market maker accepts a greater degree of delta exposure before re-adjusting the hedge.
Glossar
Higher Transaction Costs
Friction ⎊ Higher transaction costs represent increased network fees required to secure timely inclusion of a transaction into a block, functioning as economic friction for on-chain activity.
Transaction Costs
Expense ⎊ Transaction costs represent the total expenses incurred when executing a trade or interacting with a financial protocol on a blockchain.
Market Maker
Genesis ⎊ The concept of a market maker within cryptocurrency derivatives, options trading, and broader financial derivatives fundamentally addresses liquidity provision and price discovery.