MVA by replication and regression

Margin valuation adjustment (MVA) reflects the cost of initial margin posted on a trade. Here, Andrew Green and Chris Kenyon extend the semi-replication framework of Burgard and Kjaer to arrive at a computationally efficient approach to its calculation

technical blocks


Initial margins (IMs) are required by central counterparties (CCPs) and under Basel Committee for Banking Supervision (2013) between financials on all non-cleared derivatives. Regulatory IM is being phased in from September 2016 to September 2020 (Basel Committee for Banking Supervision 2015). IM is a cost when it must be funded; ie, when IM is one-sided (CCPs) or nonrehypothecable. Usually, rehypothecation is forbidden and segregation mandated, because

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