It constitutes part of x-value adjustments (XVA). By definition, it is the value adjustment that accounts for the funding costs associated with generating or managing the cash flows of a derivative instrument/ transaction. This includes the funding costs for margins and collateral, hedging costs, etc.

Funding valuation adjustment comes into play when the funding spread of the holder/ owner of a derivative is considered in its pricing. This adjustment is applied to the risk-neutral and no-default price of a single derivative or a portfolio of derivatives.