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
Dirk Schubert

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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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