Hedging Error in CVA: Impact of inconsistency between simulation and pricing models

PUBLISHED:
5 September 2018
7:43 PM

BY:
Greta Graziani

triCalculate’s sophisticated Probability Matrix Method uses common transition probability matrices for generating scenarios and pricing netting sets, allowing for consistent simulation and pricing models when computing and hedging XVAs.

But what’s the issue with alternate methods?

Traditional XVA systems separate the tasks of generating market factor paths and pricing netting set values, ultimately leading to XVA inaccuracies and mismatched hedging strategies.

In this whitepaper, we investigate the errors produced when inconsistent models for simulating risk factors and pricing netting set values are used.

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