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