CVA hedge losses prompt focus on swaptions and guarantees

Banks are turning to credit swaptions and guarantees to reduce the earnings volatility that arises when hedging the credit valuation adjustment capital charge in Basel III. By Lukas Becker

Since late 2012, Deutsche Bank has lost €443 million euros on hedges that cut its capital requirement for derivatives counterparty exposure – a trade-off banks face because the regulatory and accounting definitions of credit valuation adjustment (CVA) are different, meaning regulators might see a hedge as effective, while accountants do not. That problem has prompted some institutions – and