Podcast: Barclays’ Ben Burnett on how banks can implement HVA
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.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
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. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Cutting Edge
A comparison of FX fixing methodologies
FX fixing outcomes are mostly driven by length of calculation window
Quantum cognition machine learning: financial forecasting
A new paradigm for training machine learning algorithms based on quantum cognition is presented
Backtesting correlated quantities
A technique to decorrelate samples and reach higher discriminatory power is presented
A hard exit threshold strategy for market-makers
A closed-form solution to derive optimal stop-loss and profit-taking levels is presented
Pricing share buy-backs: an alternative to optimal control
A new method applies optimised heuristic strategies to maximise share buy-back contracts’ value
CVA sensitivities, hedging and risk
A probabilistic machine learning approach to CVA calculations is proposed
Podcast: Alvaro Cartea on collusion within trading algos
Oxford-Man Institute director worries ML-based trading could have anti-competitive effects
Podcast: Lorenzo Ravagli on why the skew is for the many
JP Morgan quant proposes a unified framework for trading the volatility skew premium