KVA in Black Scholes Pricing

The post 2007-financial crisis era has led to renewed zeal in quantifying market incompleteness when pricing contingent claims. This quantification exercise is necessary in maintaining a stable and sustainable banking operation and thus the XVAs have emerged as the metrics for market incompleteness. This dissertation focuses solely on the capital valuation adjustment (KVA) and aims to use the definition of KVA as set out by Albanese et al. (2016) in an investigation of different numerical techniques for calculating KVA. A single equity forward is considered first, followed by an equity option and then portfolios of options on two underlying assets, with the dissertation ending by considering a practical example on discrete delta and vega-delta hedging an index option. The numerical approaches explored are the binomial tree method and a combination of the crude and quasi-Monte Carlo method.

Grantor

African Institute of Financial Markets and Risk Management

Year dc:date.issued

2019

Author dc:creator

• Pavlou, Petro

Advisors dc:contributor.advisor

• Ouwehand, Peter
• Mahomed, Obeid

• Mathematical Finance

Handle dc:identifier.uri

http://hdl.handle.net/11427/30880

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/30880