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Derivatives

  Derivatives   |   Terms
  • 901
  • August 23, 2021
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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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