Capital Valuation Adjustment and Funding Valuation Adjustment

35 Pages Posted: 12 Mar 2016

See all articles by Claudio Albanese

Claudio Albanese

Global Valuation

Simone Caenazzo

Global Valuation Ltd

Stéphane Crépey

Université d'Évry - Equipe d'Analyse et Probabilites

Date Written: March 9, 2016

Abstract

In the aftermath of the 2007 global financial crisis, banks started reflecting into derivative pricing the cost of capital and collateral funding through XVA metrics. XVA is a catch-all acronym whereby X is replaced by a letter such as C for credit, D for debt, F for funding, K for capital and so on, and VA stands for valuation adjustment.

This behaviour is at odds with economies where markets for contingent claims are complete, whereby trades clear at fair valuations and the costs for capital and collateral are both irrelevant to investment decisions.

In this paper, we set forth a mathematical formalism for derivative portfolio management in incomplete markets for banks. A particular emphasis is given to the problem of finding optimal strategies for retained earnings which ensure a sustainable dividend policy.

Keywords: CVA, FVA, KVA, MVA, valuation adjustments, cost of capital, risk margin, collateral, OTC derivatives

JEL Classification: G30, M40, G21, G22

Suggested Citation

Albanese, Claudio and Caenazzo, Simone and Crépey, Stéphane, Capital Valuation Adjustment and Funding Valuation Adjustment (March 9, 2016). Available at SSRN: https://ssrn.com/abstract=2745909 or http://dx.doi.org/10.2139/ssrn.2745909

Claudio Albanese (Contact Author)

Global Valuation ( email )

9 Devonshire Sq.
London, London EC2M 4YF
United Kingdom

Simone Caenazzo

Global Valuation Ltd ( email )

9 Devonshire Square
London, EC2M 4YF
United Kingdom

Stéphane Crépey

Université d'Évry - Equipe d'Analyse et Probabilites ( email )

Boulevard des Coquibus
F-91025 Evry Cedex
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
448
Abstract Views
1,617
Rank
98,632
PlumX Metrics