Efficient XVA Management: Pricing, Hedging, and Allocation Using Trade-Level Regression and Global Conditioning

17 Pages Posted: 18 Dec 2014 Last revised: 23 Dec 2014

See all articles by Chris Kenyon

Chris Kenyon

MUFG Securities EMEA plc; University College London

Andrew David Green

Scotiabank

Date Written: December 22, 2014

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.

Keywords: Portfolio management, hedging, attribution, XVA, CVA, DVA, FVA, FCA, FBA, KVA, MVA, TVA, VAR, SVAR, Expected Shortfall, ES, CVAR, Regression, Longstaff-Schwartz, Stress Testing, AAD, AD

JEL Classification: C13, C15, C44, C51, C52, C63, D40, D61, D81, G11, G12, G13, G21, G28, K22, M40

Suggested Citation

Kenyon, Chris and Green, Andrew David, Efficient XVA Management: Pricing, Hedging, and Allocation Using Trade-Level Regression and Global Conditioning (December 22, 2014). Available at SSRN: https://ssrn.com/abstract=2539532 or http://dx.doi.org/10.2139/ssrn.2539532

Chris Kenyon (Contact Author)

MUFG Securities EMEA plc ( email )

25 Ropemaker St
London, EC2Y 9AJ
United Kingdom

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Andrew David Green

Scotiabank ( email )

201 Bishopsgate
London, London EC2M 3NS
United Kingdom

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