How to hedge CVA without being hurt

Banks can reduce their CVA capital burden by using regulator-approved hedges, but only at the risk of painful accounting losses. The solution is a new hedging instrument that works under both regimes. By Dirk Schubert

Dirk Schubert



The concept of credit valuation adjustment (CVA) has been given a brand new dynamic by the Basel III framework, which introduces a capital charge to cover future changes in exposure – a present-day reserve for tomorrow's sliding counterparty credit risk. For derivatives that can be centrally cleared, this charge is relatively low, but there are many products that cannot be cleared, creating a strong incentive for banks to reduce the size of the charge.

There are two

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

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