Models and numerical methods for XVA pricing under mean reversion spreads in a multicurrency framework

DOI10.1016/J.CNSNS.2023.107725MaRDI QIDQ6183818zbMATH OpenFDO

Authors Iñigo Arregui, Roberta Simonella, Carlos Vázquez

Publication date 23 January 2024

Published in Communications in Nonlinear Science and Numerical Simulation (Search for Journal in Brave)

Copyright license Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

Full work available at URL https://doi.org/10.1016/J.CNSNS.2023.107725

zbMATH Keywords

(non)linear PDEsfinancial derivativesLagrange-Galerkin methodmean reversion processesMonte Carlo techniquesmulticurrency settingmultilevel Picard iterationXVA

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Finite element, Rayleigh-Ritz and Galerkin methods for initial value and initial-boundary value problems involving PDEs (65M60) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Review text

This paper is devoted to the computation of total valuation adjustments (XVA) for financial derivatives involving several currencies. More precisely, for the credit spreads, the authors consider the more realistic exponential Vasicek and CIR positive mean reversion processes. Under some modelling assumptions and using appropriate dynamic hedging methodologies, the authors obtain formulations in terms of linear and nonlinear partial differential equations, which are solved with Lagrange-Galerkin methods in low dimension. The Monte Carlo method and the quadrature formulae to approximate the integral in the XVA formulae are described. The multilevel Picard iteration method, as an alternative to solve the formulation based on expectations is also described. In Section 4, the authors present and analyze the numerical results related to some examples for different choices of the derivative payoff.

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Cited in

(3)

• Modelling and Computing the Total Value Adjustment for European Derivatives in a Multi-Currency Setting
• A Multi-Level Monte-Carlo with FEM for XVA in European Options
• XVA modelling: validation, performance and model risk management

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