Arbitrage-Free Pricing of XVA - Part II: PDE Representation and Numerical Analysis

Authors Maxim Bichuch, Agostino Capponi, Stephan Sturm

Publication date 21 February 2015

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Derivative securities (option pricing, hedging, etc.) (91G20) Credit risk (91G40)

Abstract: We study the semilinear partial differential equation (PDE) associated with the non-linear BSDE characterizing buyer's and seller's XVA in a framework that allows for asymmetries in funding, repo and collateral rates, as well as for early contract termination due to counterparty credit risk. We show the existence of a unique classical solution to the PDE by first proving the existence and uniqueness of a viscosity solution and then its regularity. We use the uniqueness result to conduct a thorough numerical study illustrating how funding costs, repo rates, and counterparty credit risk contribute to determine the total valuation adjustment.

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