XVA: an accounting challenge?
by Famien Konan XVA in a nutshell The Global Financial Crisis of 2008-2009 has instituted financial institutions to reflect the market price of counterparty risk (CVA), own-default risk (DVA), funding costs and benefits (FVA), collateral (ColVA), capital (KVA) and initial margin (MVA) on the fair valuations of derivatives for pricing and accounting purposes. These valuation adjustments, collectively defined as XVAs, are the consequences of Basel III regulatory requirements, but also market practices of banks to factor in the price of the deals the risks and costs of trading derivatives. Thus, the price of derivatives has become the sum of the “risk-free price” and the XVAs: risky price = risk-free price + XVA. Figure 1: An overview of XVAs
Source: XvA goes mainstream, Solum Financial and McKinsey & Company, Inc. (June 2017) Intelligent Risk - February 2022
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