It is part of xVA (cross value adjustments); it refers to the pricing adjustment made for a collateralized derivative. It represents the cost of funding a collateralized derivative position at a representative risk-free rate. Posting collateral against a derivative position substantially changes the credit risk and funding profile of the position. For in-the-money trades, the collateral will reduce the need to fund the collateralized position at a higher rate. For out-of-the-money trades, the opposite holds.

A perfect collateralization means that credit risk if fully eliminated (in theory, this situation requires no DVA or CVA). However, in reality credit risk cannot be entirely eliminated.

Collateral value adjustment is, at times, calculated as an approximation using OIS.