Efficient XVA Management: Pricing, Hedging, and Attribution using Trade-Level Regression and Global Conditioning

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Efficient XVA Management: Pricing, Hedging, and Attribution using Trade-Level Regression and Global Conditioning

Kenyon, C; Green, A; (2015) Efficient XVA Management: Pricing, Hedging, and Attribution using Trade-Level Regression and Global Conditioning. Journal of Risk , 17 (6) pp. 1-6. Green open access

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Abstract

Banks must manage their trading books, not just value them. Pricing includes valuation adjustments collectively known as XVA (at least credit, funding, capital and tax), so management must also include XVA. In trading book management we focus on pricing, hedging, and allocation of prices or hedging costs to desks on an individual trade basis. We show how to combine three technical elements to radically simplify XVA management, both in terms of the calculations, and the implementation of the calculations. The three technical elements are: trade-level regression; analytic computation of sensitivities; and global conditioning. All three are required to obtain the radical efficiency gains and implementation simplification. Moreover, many of the calculations are inherently parallel and suitable for GPU implementation. The resulting methodology for XVA management is sufficiently general that we can cover pricing, first- and second-order sensitivities, and exact trade-level allocation of pricing and sensitivities within the same framework. Managing incremental changes to portfolios exactly is also radically simplified.

Type:	Article
Title:	Efficient XVA Management: Pricing, Hedging, and Attribution using Trade-Level Regression and Global Conditioning
Open access status:	An open access version is available from UCL Discovery
Publisher version:	https://www.risk.net/journal-of-risk/volume-17-num...
Language:	English
Additional information:	This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification:	UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics
URI:	https://discovery.ucl.ac.uk/id/eprint/10140254