![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Podcast: Barclays’ Ben Burnett on how banks can implement HVA
New valuation adjustment may lead to more efficient management of derivatives books
![Benedict Burnett Benedict Burnett](/sites/default/files/styles/landscape_750_463/public/2021-03/Benedict-Burnett.jpg.webp?h=c404aa90&itok=JhWQyNMk)
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.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-digital.com/terms-and-conditions/subscriptions/
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. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-digital.com/terms-and-conditions/subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Cutting Edge
Podcast: Lorenzo Ravagli on why the skew is for the many
JP Morgan quant proposes a unified framework for trading the volatility skew premium
Bridging the gap risk reloaded: modelling wrong-way risk and leverage
A model extends the counterparty risk calculation to include nonlinear and complex portfolios
Counterparty risk model links defaults to portfolio values
Fed’s Michael Pykhtin proposes using copula models to capture effects of margin calls on default risk
Harvesting the FX skew premium
Observing the vol-of-vol parameter may reveal a skew premium in FX markets
Weighting for leverage
A credit exposure model for leveraged collateralised counterparties is presented
Podcast: Olivier Daviaud on P&L attribution for options
JP Morgan quant discusses his alternative to Greeks decomposition
Rethinking P&L attribution for options
A buy-side perspective on how to decompose the P&L of index options is presented
Volatility shape-shifters: arbitrage-free shaping of implied volatility surfaces
Manipulating implied volatility surfaces using optimal transport theory has several applications