Estimation of Future Initial Margins in a Multi-Curve Interest Rate Framework

21 Pages Posted: 30 Oct 2015 Last revised: 3 Feb 2016

See all articles by Camilo A. Garcia Trillos

Camilo A. Garcia Trillos

University College London - Department of Mathematics

Marc P. A. Henrard

muRisQ Advisory; OpenGamma; University College London - Department of Mathematics

Andrea Macrina

University College London; University of Cape Town (UCT)

Date Written: February 3, 2016

Abstract

We propose an approach for the dynamical estimation of initial margins. We determine initial margins at future points in time by computing a risk measure of the modelled price increment over a margin period of risk. As an example, we produce the initial margin process for interest rate swap clearing where we assume that the swap price process is driven by a two-factor multi-curve interest rate model that exhibits good calibration properties. The obtained initial margin dynamics incorporate "forward-looking" information present in swaptions market data to which the swap price model is calibrated. We compare the model-generated initial margin process to initial margin data provided by clearing houses and propose adjustments to reduce the observed gap. In doing so, we in effect calibrate the initial margin process to additional market information possibly present in historical market data but not captured in the swaptions market. The margin valuation adjustment (MVA) process is obtained by an application of the risk-neutral valuation formula where the initial margin process is taken as the underlying instrument. We conclude with answers to questions we have received from the financial industry.

Keywords: Initial margin, margin valuation adjustment (MVA), multi-curve interest rate models, risk management

JEL Classification: G13, E43, C63

Suggested Citation

Garcia Trillos, Camilo A. and Henrard, Marc P. A. and Macrina, Andrea, Estimation of Future Initial Margins in a Multi-Curve Interest Rate Framework (February 3, 2016). Available at SSRN: https://ssrn.com/abstract=2682727 or http://dx.doi.org/10.2139/ssrn.2682727

Camilo A. Garcia Trillos

University College London - Department of Mathematics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Marc P. A. Henrard

muRisQ Advisory ( email )

Rue du Chemin de fer, 8
Brussels, 1210
Belgium

HOME PAGE: http://murisq.com

OpenGamma ( email )

Albert House
256-260 Old Street
London, EC1V 9DD
United Kingdom

University College London - Department of Mathematics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Andrea Macrina (Contact Author)

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

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