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FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond

Which feature of KVA distinguishes it from CVA and FVA in derivative pricing?

KVA is the capital valuation adjustment, which charges for the cost of holding regulatory capital against a derivative over its life, based on shareholders' required return. It is distinct from CVA (counterparty default loss), FVA (funding costs) and DVA (own default).

  1. AIt reflects the cost of holding regulatory capital against the trade over its lifeCorrect
  2. BIt compensates for expected loss from counterparty default
  3. CIt reflects the cost of posting variation margin
  4. DIt adjusts for the bank's own default risk

Explanation

KVA prices the return required by shareholders on capital that must be held against the trade. CVA covers expected default loss, FVA covers funding costs, and DVA the bank's own default, so the other options describe different adjustments.

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