15 Pages Posted: 2 Jan 2016 Last revised: 4 Jan 2016
Date Written: January 2, 2016
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: Suggested Citation