KVA, Mind Your P's and Q's!. Issue 102 (26th July 2019)

• Record Type: Journal Article
• Authors: Jain, Shashi; Karlsson, Patrik; Kandhai, Drona
• Is Part Of: Wilmott. Volume 2019:Issue 102(2019)
• Page Start: 60
• Page End: 73
• Publication Date: 2019-07-26
• Subjects: capital valuation adjustment (KVA) -- derivative pricing -- internal model method (IMM) -- hedging -- Monte Carlo simulation -- valuation adjustment (XVA); Finance -- Periodicals; Financial services industry -- Periodicals; 332
• DOI: 10.1002/wilm.10777
• Languages: English
• ISSNs: 1540-6962

Abstract

Abstract : There is an increasing consensus within banks on the need to recognize the impact of rising capital requirements on their derivative business in the form of capital valuation adjustment (KVA). There are still concerns over how exactly KVA should be calculated, charged, and managed. We analyze the aspects of the costs arising due to holding of counterparty credit risk capital. This study demonstrates that banks which are careless with their KVA method and ignore actively managing it, can rake a significant loss and will eventually increase uncertainty in the shareholders' return on capital.