MVA: Future IM for Client Trades & Dynamic Hedges

Abstract

Servicing clients can require posting Initial Margin (IM) for client trades, and for their hedges. IM should be forecast for both and reflected in MVA. For non-vanillas with dynamic hedges, forecasting hedge-trade IM is challenging as future hedge ratios are necessary, and future sensitivities are difficult to compute. However, future sensitivities are already required to forecast client-trade IM, and thus future hedges (e.g., delta and vega) can be determined. In turn, this allows IM requirements to be forecast for cleared hedges (e.g., swaps) and non-cleared hedges (e.g., swaptions).