Hedging valuation adjustment: fact and friction

Transaction costs’ impact on hedging can now be quantified

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Benedict Burnett develops a simple and generic expression for the impact of transaction costs on the value of a derivative portfolio, expressed as a ‘hedging valuation adjustment’ (HVA). This HVA expression is provided for both hedged and unhedged cases, with the hedged case manifesting an ‘imaginary volatility’ effect in certain cases

The problem of real-world hedging has troubled option theory since its earliest days: a trader cannot realistically hedge their

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