Risk.net Barclays quant proposes methodology for factoring hedging costs into derivatives valuations Dealers make various adjustments to the fair value of derivatives contracts to account for the credit risk, funding costs and capital requirements associated with these transactions. But, somehow, the cost of hedging has so far escaped the attention of XVA desks. While it is standard practice to set aside ad hoc reserves to cover the cost of hedging, a formal mathematical formula for calculating these has been lacking. “Banks typically take transaction costs into account, but normally using just a heuristic approach,” says an XVA quant at a global bank.