Podcast: Barclays’ Ben Burnett on how banks can implement HVA
New valuation adjustment may lead to more efficient management of derivatives books
New valuation adjustment may lead to more efficient management of derivatives books
In this episode of Quantcast, Ben Burnett, a director of the XVA quant team at Barclays, discusses the development and application of a hedging valuation adjustment (HVA) to derivatives transactions.
HVA measures the impact of transaction costs on the value of a derivatives book. Burnett introduced the concept and explained how to calculate it in a paper published in Risk.net in February.
His latest paper, co-written with Barclays colleague Ieuan Williams, sets out a framework for consistently calculating HVA alongside other derivatives valuation adjustments (XVAs).
Banks’ approaches to dealing with the transaction costs associated with hedging derivatives books are somewhat ad hoc. A rigorous calculation may make a big difference. Quantifying future transaction costs will allow banks to manage these more effectively. And pricing these costs upfront will give banks a better understanding of the profitability of a trade, allowing them to make more informed decisions about whether to enter into it in the first place.
Burnett’s research shows HVA is comparable in size to that of other valuation adjustments and can amount to as much as CVA. If his analysis is any indication, it could soon become a staple of XVA desks.
Index:
00:00 What is HVA?
03:33 How is it calculated?
07:20 Existing approaches to calculating transaction costs
09:45 The advantages of quantifying HVA
12:05 The cross-gamma effect and its impact on XVA desks
16:50 Interaction of HVA with other valuation adjustments
21:15 Close-out aspect that arises with HVA
23:30 What’s left to research about HVA?
To hear the full interview, listen in the player above, or download. Future podcasts in our Quantcast series will be uploaded to Risk.net. You can also visit the main page here to access all tracks, or go to the iTunes store or Google Podcasts to listen and subscribe.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Cutting Edge
Georgios Skoufis on RFRs, convexity adjustments and Sabr
Bloomberg quant discusses his new approach for calculating convexity adjustments for RFR swaps
Infrequent MtM reduces neither value-at-risk nor backtesting exceptions
Frequency of repricing impacts volatility and correlation measures
Dynamic margining long/short equity trading strategies
A repo haircut model extends a previous solution for long-only strategies
SABR convexity adjustment for an arithmetic average RFR swap
A model-independent convexity adjustment for interest rate swaps is introduced
Joint S&P 500/VIX smile calibration in discrete and continuous time
An arbitrage-free model for exotic options that captures smiles and futures is presented
The carbon equivalence principle: minimising the cost to carbon net zero
A method to align incentives with sustainability in financial markets is introduced
The cost of mis-specifying price impact
Expected returns can be significantly affected by the wrong use of impact models
Most read
- Quants are using language models to map what causes what
- Reluctantly, CME moves to clear US Treasuries
- The bank quant who wants to stop gen AI hallucinating