Abstract
Lower and upper prudent valuations in two price economies obtained on sufficiently distorting physical probabilities for returns to horizons matching option maturities straddle the market prices of options. Market prices are then modeled as geometric averages of the extremal valuations. Upper valuation weights sensitive to moneyness are calibrated to market data for 203 underliers over seven years. Hedges are designed to minimize capital defined as the upper lower valuation spread. The hedging criterion is immune to cost of hedge issues, works on both aspects of super and sub replication and provides a dispersion measure with parametric control over hedge aggresiveness.
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