The Economics of XVA Trading

Author: Peter J. Zeitsch

ABSTRACT
The theory of trading with value adjustments, or XVA, is well established. However, the market still differs significantly in pricing practice with houses applying varying numbers of adjustments to the same trade; or none at all. Here the aim is to outline the basic trading strategies used by XVA desks and to explore the implications in terms of the risk transfer involved and the resulting profit and loss. This is achieved through case studies of actual traded structures including details of the positions themselves and the motivation for executing them. The mark-to-market impact is also quantified. Following one case study, a methodology to calculate the cost of funding Initial Margin, or MVA, for linear products will be developed.

Source:

Journal: Journal of Mathematical Finance
DOI: 10.4236/jmf.2017.72013 (PDF)
Paper Id: 76056 (metadata)

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