The Cost of Hedging XVA

Risk Magazine, April 2021

13 Pages Posted: 18 Feb 2021 Last revised: 29 Jun 2021

See all articles by Benedict Burnett

Benedict Burnett

Barclays Investment Bank

Ieuan Williams

affiliation not provided to SSRN

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

Burnett, Benedict and Williams, Ieuan, The Cost of Hedging XVA (February 1, 2021). Risk Magazine, April 2021, Available at SSRN: https://ssrn.com/abstract=3777095 or http://dx.doi.org/10.2139/ssrn.3777095

Benedict Burnett (Contact Author)

Barclays Investment Bank ( email )

5 The North Colonnade
London, Canary Wharf E14 4BB
United Kingdom

Ieuan Williams

affiliation not provided to SSRN

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