MVA: Initial Margin Valuation Adjustment by Replication and Regression

15 Pages Posted: 4 May 2014 Last revised: 13 Jan 2015

Date Written: January 12, 2015

Abstract

Initial margin requirements are becoming an increasingly common feature of derivative markets. However, while the valuation of derivatives under collateralisation (Piterbarg, 2010, 2012a), under counterparty risk with unsecured funding costs (FVA) (Burgard and Kjaer, 2011a, 2011b, 2013) and in the presence of regulatory capital (KVA) (Green, Kenyon and Dennis, 2014) are established through valuation adjustments, hitherto initial margin has not been considered. This paper further extends the semi-replication framework of Burgard and Kjaer (2013), itself later extended by Green, Kenyon and Dennis (2014), to cover the cost of initial margin, leading to Margin Valuation Adjustment (MVA). Initial margin requirements are typically generated through the use of VAR or CVAR models. Given the form of MVA as an integral over the expected initial margin profile this would lead to excessive computational costs if a brute force calculation were to be used. Hence we also propose a computationally efficient approach to the calculation of MVA through the use of regression techniques, Longstaff-Schwartz Augmented Compression (LSAC).

Keywords: MVA, IM, FVA, BCBS-261, margins, non-centrally cleared derivatives, VAR, Longstaff-Schwartz, GPU, CCPs, Central Clearing

JEL Classification: C63, G12, G21, G28, K23

Suggested Citation

Green, Andrew David and Kenyon, Chris, MVA: Initial Margin Valuation Adjustment by Replication and Regression (January 12, 2015). Available at SSRN: https://ssrn.com/abstract=2432281 or http://dx.doi.org/10.2139/ssrn.2432281

Andrew David Green

Scotiabank ( email )

201 Bishopsgate
London, London EC2M 3NS
United Kingdom

Chris Kenyon (Contact Author)

MUFG Securities EMEA plc ( email )

25 Ropemaker St
London, EC2Y 9AJ
United Kingdom

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