Hedging valuation adjustment gets cold shoulder from banks
Dealers back the idea of charging for hedging costs – including FX options – but not as part of a new XVA
The market shocks set off by Covid-19 last year supplied striking proof that the costs of hedging and re-hedging derivatives trades could be, in the words of one senior banker, “phenomenal”. Yet these costs are not always baked into the price of the trade at the outset, hitting banks when bid-offer spreads widen.
Most dealers agree that hedging costs should be included in the price of a trade, but opinions differ when it comes to how they should be treated: as a transparent add-on to the price
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