XVA at the Exercise Boundary
Pricing of Securities
2016-10-04 v1 Computational Finance
Portfolio Management
Risk Management
Abstract
XVA is a material component of a trade valuation and hence it must impact the decision to exercise options within a given netting set. This is true for both unsecured trades and secured / cleared trades where KVA and MVA play a material role even if CVA and FVA do not. However, this effect has frequently been ignored in XVA models and indeed in exercise decisions made by option owners. This paper describes how XVA impacts the exercise decision and how this can be readily evaluated using regression techniques (Longstaff and Schwartz 2001). The paper then assesses the materiality of the impact of XVA at the exercise boundary on swaption examples.
Cite
@article{arxiv.1610.00256,
title = {XVA at the Exercise Boundary},
author = {Andrew Green and Chris Kenyon},
journal= {arXiv preprint arXiv:1610.00256},
year = {2016}
}
Comments
15 pages, 8 figures, 3 tables