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XVA at the Exercise Boundary

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  • Andrew Green
  • Chris Kenyon

Abstract

XVA is a material component of a trade valuation and hence it must impact the decision to exercise options within a given netting set. This is true for both unsecured trades and secured / cleared trades where KVA and MVA play a material role even if CVA and FVA do not. However, this effect has frequently been ignored in XVA models and indeed in exercise decisions made by option owners. This paper describes how XVA impacts the exercise decision and how this can be readily evaluated using regression techniques (Longstaff and Schwartz 2001). The paper then assesses the materiality of the impact of XVA at the exercise boundary on swaption examples.

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  • Andrew Green & Chris Kenyon, 2016. "XVA at the Exercise Boundary," Papers 1610.00256, arXiv.org.
    • Handle: RePEc:arx:papers:1610.00256
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. Andrew Green & Chris Kenyon, 2014. "KVA: Capital Valuation Adjustment," Papers 1405.0515, arXiv.org, revised Oct 2014.
    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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