MVA transfer pricing

Meeting central counterparty and regulatory margin requirements involves funding costs that have to be transferred to client-side derivatives pricing. Wujiang Lou extends liability-side pricing theory to initial margin to allow partial differential equation-based solutions to margin valuation adjustment and incremental transfer pricing of uncollateralised trades, and computes bid/ask spreads for trades covered under BCBS-Iosco

With the September 2016 rollout of margin requirements for non-centrally cleared over-the-counter derivatives (BCBSIosco 2015) fast approaching, derivatives pricing with initial margin (IM) remains a significant challenge as IM - essentially a capital measure of potential future exposure - forces historical scenarios into a pricing model.

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At a fixed future time, for