MVA: How to Forecast Initial Margin for Client Trades and Dynamic Hedges

From the perspective of trading economics, initial margin (IM) requirements are impactful, owing to the associated funding costs. This is the role of Margin Valuation Adjustment (MVA), which represents the cost of funding IM requirements over the life of a trade, or over the life of a portfolio.

Up until now the focus of MVA has been primarily on the client trade. However, from a bank perspective, servicing clients can require posting IM for client trades, and for their hedges. Thus, IM should be forecasted for both and reflected in MVA.

On Wednesday, December 5th at 10:00am EST, Numerix Director of Quantitative Research, Andrew McClelland , Ph.D., identified how IM requirements arise from client trades and the hedge trades they necessitate, with the aim of accurately determining the total MVA impact of the trade to the bank.

Dr. McClelland addressed:

  • Basic definitions and background for CCR, VM, MPoR (Margin Period of Risk), IM and MVA Valuation Adjustment
  • Structure of an MVA calculation and forecasting sensitivities for IM
  • IM for dynamic hedges: forecasting hedge ratios and hedge-side IM
  • Worked example for a Bermudan hedged by vanilla swaps and swaptions
  • When, and how much, hedge-side IM to charge on to clients
  • Key Takeaways

 

Featured Speaker:

Andrew McClellandAndrew McClelland, Ph.D., Director, Quantitative Research, Numerix
Andrew McClelland's work at Numerix focuses on counterparty credit risk issues including valuation adjustments and counterparty exposure production for structured products. He also works on numerical methods for efficient production of risk profiles under real-world measures.

Andrew received his Ph.D. in finance at the Queensland University of Technology in financial econometrics. His research involved markets exhibiting crash feedback, option pricing, and parameter estimation using particle filtering methods. His work has been published in the Journal of Banking and Finance, the Journal of Econometrics, and the Journal of Business and Economic Statistics.

JamesJockleModerator: James Jockle, Chief Marketing Officer, Numerix
Mr. Jockle leads the company's global marketing efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to customers in the largest global financial markets and to the Numerix partner network through the company's branding, electronic marketing, research, events, public relations, advertising and relationship marketing.

Prior to joining Numerix, he served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, Mr. Jockle built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. He also oversaw the brand development of a new company dedicated to the enhancement of credit derivative and structured-credit ratings, products and services. Prior to Fitch, Mr. Jockle was a member of the communications team at Moody's Investors Service.

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video blog

Steering the Initial Margin Process to Determine Full MVA Cost