Computing MVA via Regression and Principal Component Analysis
19 Pages Posted: 18 Jul 2017 Last revised: 18 Dec 2017
Date Written: December 17, 2017
MVA is today’s price of the future costs generated by future initial margin postings. Computing MVA requires long-term risk neutral simulations of future initial margin amounts. The ISDA SIMM computes initial margin based on the portfolio’s sensitivity with respect to a high-dimensional vector of risk factors. In this note, we describe a way to approximate future SIMM based initial margin amounts in terms of regression functions with respect to a small number of explanatory variables. Our method uses principal components analysis, and it fits in naturally with American Monte Carlo techniques.
Keywords: MVA, initial margin, ISDA SIMM, AMC
Suggested Citation: Suggested Citation