XVA analysis from the balance sheet

Claudio Albanese, Stéphane Crépey, Rodney Hoskinson and Bouazza Saadeddine

Quantitative Finance, 2021, vol. 21, issue 1, 99-123

Abstract: XVAs denote various counterparty risk related valuation adjustments that are applied to financial derivatives since the 2007–2009 crisis. We root a cost-of-capital XVA strategy in a balance sheet perspective which is key to identifying the economic meaning of the XVA terms. Our approach is first detailed in a static setup that is solved explicitly. It is then plugged into the dynamic and trade incremental context of a real derivative banking portfolio. The corresponding cost-of-capital XVA strategy ensures for bank shareholders a submartingale equity process corresponding to a target hurdle rate on their capital at risk, consistently between and throughout deals. Set on a forward/backward SDE formulation, this strategy can be solved efficiently using GPU computing combined with deep learning regression methods in a whole bank balance sheet context. A numerical case study emphasizes the workability and added value of the ensuing pathwise XVA computations.

Date: 2021
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Working Paper: XVA Analysis From the Balance Sheet (2021)
Working Paper: XVA Analysis From the Balance Sheet (2020)
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DOI: 10.1080/14697688.2020.1817533

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