This paper introduces a new model risk measure based on hedging strategies to
estimate model risk and provision calculation under uncertainty of volatility.
This measure allows comparing different products and models (pricing
hypothesis) under a homogeneous framework and conclude which one is the best.
The model risk measure is defined in terms of the expected value and standard
deviation of the loss given by the hedging strategy at a given time horizon. It
has been assumed that the market volatility surface is driven by Heston's
dynamics calibrated to market for a given time horizon. The method is applied
to estimate and compare model risk under volga-vanna and Black-Scholes models
for double-no-touch options and a porfolio of forward fader options.