XVA analysis from the balance sheet |
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Authors: | Claudio Albanese Rodney Hoskinson Bouazza Saadeddine |
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Institution: | 1. Global Valuation ltd, London, UK;2. ANZ Banking Group, Singapore, Singapore;3. LaMME, Paris-Saclay/Univ Evry, Evry, France;4. Quantitative Research GMD/GMT Credit Agricole CIB, Paris, France |
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Abstract: | XVAs denote various counterparty risk related valuation adjustments that are applied to financial derivatives since the 2007–2009 crisis. We root a cost-of-capital XVA strategy in a balance sheet perspective which is key to identifying the economic meaning of the XVA terms. Our approach is first detailed in a static setup that is solved explicitly. It is then plugged into the dynamic and trade incremental context of a real derivative banking portfolio. The corresponding cost-of-capital XVA strategy ensures for bank shareholders a submartingale equity process corresponding to a target hurdle rate on their capital at risk, consistently between and throughout deals. Set on a forward/backward SDE formulation, this strategy can be solved efficiently using GPU computing combined with deep learning regression methods in a whole bank balance sheet context. A numerical case study emphasizes the workability and added value of the ensuing pathwise XVA computations. |
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Keywords: | Counterparty risk Balance sheet of a bank Market incompleteness Wealth transfer X-valuation adjustment (XVA) Deep learning Quantile regression |
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