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. 

Quantcast – a Risk.net Cutting Edge podcast · Ben Burnett – 21/03/21

 

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.