The Cost of Hedging XVA
Risk Magazine, April 2021
13 Pages Posted: 18 Feb 2021 Last revised: 29 Jun 2021
Date Written: February 1, 2021
Abstract
We generalise the results of Burnett (2021) to obtain a formula for the Hedging Valuation Adjustment (HVA) that is consistent with other XVAs. This HVA incorporates friction effects due to hedging both the underlying asset and counterparty credit, along with a contribution from hedge unwinds upon counterparty default. We show numerical results for a simple case, which demonstrate that in a realistic situation the HVA can be on the same scale as more classical XVAs.
Keywords: XVA, CVA, FVA, MVA, HVA, Friction, Transaction costs, Hedging, Incomplete Markets, Derivatives, Valuation
JEL Classification: D23, G12, G13
Suggested Citation: Suggested Citation