arbiter
JournalsAccount

THE RECALIBRATION CONUNDRUM: HEDGING VALUATION ADJUSTMENT FOR CALLABLE CLAIMS

Cyril Bénézet et al.

International Journal of Theoretical and Applied Finance2025https://doi.org/10.1142/s0219024925500220article
AJG 2ABDC B
Weight
0.50

Abstract

The dynamic hedging theory only makes sense in the setup of one given model, whereas the practice of dynamic hedging is just the opposite, with models fleeing after the data through daily recalibration. This is quite a quantitative finance paradox. In this paper, we revisit the notion of hedging valuation adjustment (HVA), originally intended to deal with dynamic hedging frictions, in the direction of recalibration and model risks. Specifically, we extend to callable assets the HVA model risk approach from earlier work. The classical way to deal with model risk is to reserve the differences between the valuations in reference models and in the local models used by traders. However, while traders’ prices are thus corrected, their hedging strategies and their exercise decisions are still wrong, which necessitates a risk-adjusted reserve. We illustrate our approach on a stylized callable range accrual representative of huge amounts of structured products on the market. We show that a model risk reserve adjusted for the risk of wrong exercise decisions may largely exceed a basic reserve only accounting for valuation differences.

Open via your library →

Cite this paper

https://doi.org/https://doi.org/10.1142/s0219024925500220

Or copy a formatted citation

@article{cyril2025,
  title        = {{THE RECALIBRATION CONUNDRUM: HEDGING VALUATION ADJUSTMENT FOR CALLABLE CLAIMS}},
  author       = {Cyril Bénézet et al.},
  journal      = {International Journal of Theoretical and Applied Finance},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1142/s0219024925500220},
}

Paste directly into BibTeX, Zotero, or your reference manager.

Flag this paper

THE RECALIBRATION CONUNDRUM: HEDGING VALUATION ADJUSTMENT FOR CALLABLE CLAIMS

Flags are reviewed by the Arbiter methodology team within 5 business days.

Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.