FVA
Funding Valuation Adjustment, or FVA, is a concept in derivatives pricing that reflects the cost of funding a position over its life. It captures the funding costs associated with borrowing or posting collateral, as well as the opportunity costs of tying up capital. FVA is one of the adjustments in the family known as XVA, complementing other measurements such as CVA for credit risk and DVA for own credit risk.
Intuitively, FVA represents how the price of a derivative would change if a bank had to fund
Calculation can be framed as the present value of expected future funding costs, obtained by integrating funding
There is debate about FVA, with critics arguing it can introduce nonlinearity or potential double counting
In practice, FVA is used by banks and financial institutions in pricing and risk assessment of derivative