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

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.

19 pages, 3 figures, 2 tables. The paper arXiv:1608.02690 subsumes the present working paper as well as arXiv:1501.05893