Hedging CVA and DVA

The practical technology, quantitative and regulatory implications of CVA have taken center stage over the past several months, however the debate is now shifting towards CVA hedging due to the impact it can have on the bottom line. Particularly relevant in today's financial reporting requirements and regulatory environments, banks are now considering the effects of hedging to reduce earnings volatility from changes in CVA, while also considering the utilization of hedging to reduce regulatory CVA capital charges. This article explores the complex hedging decisions banks are faced with today and the diverse range of instruments and costs needed to determine the potential impact of front office earnings volatility hedging versus regulatory capital reduction.