Redefining KVA

15 Pages Posted: 2 Jan 2016 Last revised: 4 Jan 2016

Date Written: January 2, 2016

Abstract

KVA has emerged as a hot topic during the most recent a few years. There still exist vastly different opinions among major banks regarding the understanding and treatment of KVA. In the present article, we discuss the characteristics of capital costs, OTC derivatives accounting and various aspects of OTC derivative businesses, in an attempt to clear up some confusions around the KVA. We think KVA should not be regarded as a valuation adjustment similar to the way other XVAs like CVA, FVA and LVA, are treated; rather it is more of a measure of profitability of the derivative business. For a normal OTC derivative trading business, we argue that KVA should not be reported accounting-wise the same way as other valuation adjustments.

Keywords: XVA, CVA, FVA, KVA, Capital Value Adjustment, Derivative Valuation

JEL Classification: G12

Suggested Citation

Lu, Dongsheng, Redefining KVA (January 2, 2016). Available at SSRN: https://ssrn.com/abstract=2710217 or http://dx.doi.org/10.2139/ssrn.2710217

Dongsheng Lu (Contact Author)

The Bank of New York Mellon ( email )

One Wall Street
New York, NY 10286
United States

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