Climate is changing for derivatives valuation adjustments
Banks back increased use of global warming criteria when calculating XVAs
When pricing new long-dated derivatives contracts, dealers are increasingly factoring in how climate change will affect their counterparties’ underlying business. To incorporate this additional risk, firms are developing new valuation adjustment methods.
The trend follows the publication last year of a paper by Chris Kenyon, head of quantitative innovation and valuation adjustment quant modelling at MUFG, and Mourad Berrahoui, head of counterparty credit risk modelling at Lloyds Banking Group
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