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The fundamental representation of pricing adjustments

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  • Benedict Burnett
  • Ryan McCrickerd
  • Benjamin Piau

Abstract

This article consolidates and extends past work on derivative pricing adjustments, including XVA, by providing an encapsulating representation of the adjustment between any two derivative pricing functions, within an Ito SDE/parabolic PDE framework. We give examples of this representation encapsulating others from the past 20 years, ranging from a well known option pricing adjustment introduced by Gatheral, to the collection of semi-replication XVA originating from Burgard & Kjaer. To highlight extensions, we discuss certain meta-adjustments beyond XVA, designed to help signal and mitigate XVA model risk.

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  • Benedict Burnett & Ryan McCrickerd & Benjamin Piau, 2025. "The fundamental representation of pricing adjustments," Papers 2503.14997, arXiv.org.
    • Handle: RePEc:arx:papers:2503.14997
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    References listed on IDEAS

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    1. Andrew Green & Chris Kenyon, 2014. "KVA: Capital Valuation Adjustment," Papers 1405.0515, arXiv.org, revised Oct 2014.
    2. Nicole El Karoui & Monique Jeanblanc‐Picquè & Steven E. Shreve, 1998. "Robustness of the Black and Scholes Formula," Mathematical Finance, Wiley Blackwell, vol. 8(2), pages 93-126, April.
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