eprintid: 10140255 rev_number: 14 eprint_status: archive userid: 608 dir: disk0/10/14/02/55 datestamp: 2022-01-12 13:46:25 lastmod: 2022-03-13 07:10:25 status_changed: 2022-01-12 13:46:25 type: article metadata_visibility: show creators_name: Green, A creators_name: Kenyon, C title: KVA: Capital Valuation Adjustment ispublished: pub divisions: UCL divisions: B04 divisions: C06 divisions: F59 note: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions. abstract: Credit (CVA), Debit (DVA) and Funding Valuation Adjustments (FVA) are now familiar valuation adjustments made to the value of a portfolio of derivatives to account for credit risks and funding costs. However, recent changes in the regulatory regime and the increases in regulatory capital requirements has led many banks to include the cost of capital in derivative pricing. This paper formalises the addition of cost of capital by extending the Burgard-Kjaer (2013) semi-replication approach to CVA and FVA to include an addition capital term, Capital Valuation Adjustment (KVA, i.e. Kapital Valuation Adjustment to distinguish from CVA.) The utilization of the capital for funding purposes is also considered. The use of the semi-replication approach means that the flexibility around the treatment of self-default is carried over into this analysis. The paper further considers the practical calculation of KVA with reference to the Basel II (BCBS-128) and Basel III (BCBS-189) capital regimes and their implementation via CRD IV. The paper also assesses how KVA may be hedged, given that any hedging transactions themselves lead to regulatory capital requirements and hence capital costs. Finally a number of numerical examples are presented to gauge the cost impact of KVA on vanilla derivative products. date: 2014-12 official_url: https://www.risk.net/ oa_status: green full_text_type: pub language: eng primo: open primo_central: open_green verified: verified_manual elements_id: 1909535 lyricists_name: Kenyon, Chris lyricists_id: CKENY22 actors_name: Kenyon, Chris actors_id: CKENY22 actors_role: owner full_text_status: public publication: Journal of Risk citation: Green, A; Kenyon, C; (2014) KVA: Capital Valuation Adjustment. Journal of Risk Green open access document_url: https://discovery.ucl.ac.uk/id/eprint/10140255/1/2014-12%20RISK%20kva.pdf