Xva

Xva is a collective term used in finance to describe a family of valuation adjustments applied to the prices of over-the-counter derivatives. These adjustments account for risks and costs that are not captured by a standard risk-free valuation, including counterparty credit risk, funding costs, collateral mechanics, and capital requirements. The most common elements are CVA (credit valuation adjustment), DVA (debit valuation adjustment), FVA (funding valuation adjustment), MVA (margin valuation adjustment), ColVA (collateral valuation adjustment), and KVA (capital valuation adjustment).

CVA represents the expected loss to a dealer from a counterparty’s potential default over the life of the derivative, weighted by the exposure. DVA reflects the impact of the bank’s own credit risk on its liabilities, effectively reducing the value from the bank’s perspective. FVA captures funding costs associated with financing the position and any posted collateral. MVA accounts for the cost of funding margins and collateral put in place to collateralize trades. ColVA relates to adjustments arising specifically from collateral arrangements. KVA reflects the cost of holding regulatory capital against the derivative position under frameworks such as Basel III.

Xva calculations typically use a risk-neutral framework with stochastic models for interest rates, credit spreads, exposures, and collateral flows. Computation relies on estimates of default intensities, recovery rates, and funding curves, and results can be sensitive to modeling choices and calibration. There is ongoing industry debate about the inclusion and sizing of certain components, especially DVA, and about standardization across institutions.

In practice, XVA influences how banks price and manage derivative portfolios, linking pricing to risk controls, accounting conventions, and regulatory requirements.