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Arbitrage-Free Pricing of XVA - Part II: PDE Representation and Numerical Analysis

Maxim Bichuch, Agostino Capponi and Stephan Sturm

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Abstract: We study the semilinear partial differential equation (PDE) associated with the non-linear BSDE characterizing buyer's and seller's XVA in a framework that allows for asymmetries in funding, repo and collateral rates, as well as for early contract termination due to counterparty credit risk. We show the existence of a unique classical solution to the PDE by first proving the existence and uniqueness of a viscosity solution and then its regularity. We use the uniqueness result to conduct a thorough numerical study illustrating how funding costs, repo rates, and counterparty credit risk contribute to determine the total valuation adjustment.

Date: 2015-02, Revised 2016-08
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Handle: RePEc:arx:papers:1502.06106