Distributionally Robust XVA via Wasserstein Distance Part 2: Wrong Way Funding Risk

TL;DR

This paper develops a distributionally robust approach to calculating funding valuation adjustments (FVA) for OTC derivatives using Wasserstein distance, addressing wrong way funding risk and providing computational insights.

Contribution

It introduces a dual formulation for robust FVA under Wasserstein ambiguity and explores its computational implications for OTC derivatives.

Findings

Robust FVA increases under distributional uncertainty.

Dual formulation simplifies robust FVA computation.

Potential extensions to KVA and MVA are discussed.

Abstract

This paper investigates calculations of robust funding valuation adjustment (FVA) for over the counter (OTC) derivatives under distributional uncertainty using Wasserstein distance as the ambiguity measure. Wrong way funding risk can be characterized via the robust FVA formulation. The simpler dual formulation of the robust FVA optimization is derived. Next, some computational experiments are conducted to measure the additional FVA charge due to distributional uncertainty under a variety of portfolio and market configurations. Finally some suggestions for future work, such as robust capital valuation adjustment (KVA) and margin valuation adjustment (MVA), are discussed.