Projects

DVA

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Hedging the DVA (Debt Valuation Adjustment) represents a formidable challenge in risk management, since the bank (or hedger) should sell protection on itself to cover his own credit risk. Moreover, DVA is a hybrid risk, subject to numerous and possibly correlated risk drivers. A popular strategy when facing this problem is hedging the credit risk by proxy: e.g. selling protection on a basket of names which are highly correlated with the hedger. The aim of the project is to generate such a hedging strategy exploiting hidden patterns and correlation structures of the different hedging instruments. Given the complexity the problem, a simplified version of the financial environment will be considered. The DVA within this challenge is not generated by a portfolio of derivatives, but from a series of future deterministic cash flows that the bank is expected to pay to a counterparty. As the strategy will support the desk in charge of covering the bank from these risks, it will be necessary to implement the proposed strategy in an online fashion and indicate the confidence of the hedging signal.

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