Abstract
XVAs denote various counterparty risk related valuation adjustments that are applied to financial derivatives since the 2007–2009 crisis. We root a cost-of-capital XVA strategy in a balance sheet perspective which is key to 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 into the dynamic and trade incremental context of a real derivative banking portfolio. The corresponding cost-of-capital XVA strategy ensures for 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.
Accepted Version (
Free)
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
