XVA Analysis From the Balance Sheet

Claudio Albanese, Stephane Crepey, Rodney Hoskinson and Bouazza Saadeddine

Papers from arXiv.org

Abstract: XVAs denote various counterparty risk related valuation adjustments that are applied to financial derivatives since the 2007--09 crisis. We root a cost-of-capital XVA strategy in a balance sheet perspective which is key in 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 in the dynamic and trade incremental context of a real derivative banking portfolio. The corresponding cost-of-capital XVA strategy ensures to 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: 2020-09
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (6)

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http://arxiv.org/pdf/2009.00368 Latest version (application/pdf)

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Working Paper: XVA Analysis From the Balance Sheet (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2009.00368

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