Why XVAs need to be factored into options pricing
Ignoring valuation adjustments could be storing up problems for the future
If you thought derivatives valuation adjustments (XVAs) had become easy, it is time for a new challenge.
So far, much of the discussion around accurately estimating XVAs – reflecting costs associated with funding, counterparty credit risk, capital and initial margin – has centred on swaps, often leaving products such as options on the sidelines because of the sheer complexity of estimating them correctly.
Typically, XVAs are calculated by taking the expected positive exposures of a derivative
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