English

MVA: Initial Margin Valuation Adjustment by Replication and Regression

Pricing of Securities 2015-01-13 v2 General Finance Risk Management

Abstract

Initial margin requirements are becoming an increasingly common feature of derivative markets. However, while the valuation of derivatives under collateralisation (Piterbarg 2010, Piterbarg2012), under counterparty risk with unsecured funding costs (FVA) (Burgard2011, Burgard2011, Burgard2013) and in the presence of regulatory capital (KVA) (Green2014) are established through valuation adjustments, hitherto initial margin has not been considered. This paper further extends the semi-replication framework of (Burgard2013a), itself later extended by (Green2014), 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

Cite

@article{arxiv.1405.0508,
  title  = {MVA: Initial Margin Valuation Adjustment by Replication and Regression},
  author = {Andrew Green and Chris Kenyon},
  journal= {arXiv preprint arXiv:1405.0508},
  year   = {2015}
}

Comments

15 pages, 4 figures, 2 tables

R2 v1 2026-06-22T04:05:01.189Z