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 Speakers
Andrew McClelland, Ph.D.
Andrew McClelland’s quantitative research at Numerix focuses on XVA pricing and hedging, generating counterparty credit risk metrics for structured products, and estimating risk model parameters via time-series estimation. He earned his PhD in finance at the Queensland University of Technology for a thesis on financial econometrics. He considered markets exhibiting crash feedback, option pricing for such markets, and parameter estimation for such markets using particle filtering methods. Dr. McClelland’s work has been published in the Journal of Banking and Finance, the Journal of Econometrics, and the Journal of Business and Economic Statistics.
As Chief Marketing Officer and Executive Vice President of Global Marketing & Corporate Communications, James leads the company’s global marketing and corporate communications efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to clients 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.
Since joining Numerix in 2008, James has launched the organization’s award-winning thought leadership program, bringing to light challenges and insights from Numerix market experts. He also hosts the Numerix Video Blog, tackling the challenges pressing the derivatives markets—from regulatory issues to trading strategies.
Prior to joining Numerix, James served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, he built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. Prior to Fitch, James was a member of the communications team at Moody's Investors Service.
