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

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  • Chris Kenyon
  • Andrew Green

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.

Suggested Citation

  • Chris Kenyon & Andrew Green, 2014. "Efficient XVA Management: Pricing, Hedging, and Attribution using Trade-Level Regression and Global Conditioning," Papers 1412.5332, arXiv.org, revised Dec 2014.
    • Handle: RePEc:arx:papers:1412.5332
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    References listed on IDEAS

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    1. Mark Broadie & Paul Glasserman, 1996. "Estimating Security Price Derivatives Using Simulation," Management Science, INFORMS, vol. 42(2), pages 269-285, February.
    2. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    3. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    4. Dirk Tasche, 2007. "Capital Allocation to Business Units and Sub-Portfolios: the Euler Principle," Papers 0708.2542, arXiv.org, revised Jun 2008.
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    Cited by:

    1. Stéphane Crépey & Matthew F Dixon, 2020. "Gaussian process regression for derivative portfolio modeling and application to credit valuation adjustment computations," Post-Print hal-03910109, HAL.
    2. Claudio Albanese & Marc Chataigner & Stéphane Crépey, 2020. "Wealth Transfers, Indifference Pricing, and XVA Compression Schemes," Post-Print hal-03910047, HAL.
    3. St'ephane Cr'epey & Matthew Dixon, 2019. "Gaussian Process Regression for Derivative Portfolio Modeling and Application to CVA Computations," Papers 1901.11081, arXiv.org, revised Oct 2019.

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