Given that continuous rehedging is not possible, how often should a trader rehedge?
The answer to this question will depend on each trader’s cost structure and risk tolerance. We have already noted that a trader’s transaction costs are likely to affect the frequency at which adjustments are made. Higher transaction costs will often lead to less frequent adjustments.
If we ignore the question of transaction costs, there are two common approaches to rehedging: rehedge at regular intervals or rehedge whenever the delta becomes unbalanced by a predetermined amount.