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Capital Valuation Adjustment


It is part of x-value adjustments (XVA). By definition, it captures the impact of regulatory capital (capital costs) on derivative pricing. It reflects the cost of meeting regulatory capital requirements for a derivative position over the course of its time to maturity.

Simply stated, a bank holding derivative contracts will need to increase the capital imposed by regulators- i.e., capital valuation adjustment is the cost of additional regulatory capital. It is a risk premium– the cost of compensating shareholder capital at risk using a given hurdle rate.

Capital valuation adjustment is known for short as KVA.



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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