KVA: capital valuation adjustment by replication

KVA are introduced to take into account the effect of capital on funding



Capital is a legal requirement for financial institutions holding derivatives, and the requirements have increased over the past few years (Basel Committee on Banking Supervision 2011; Dodd and Frank 2010), so it is surprising few papers include it in derivatives pricing (Hull and White 2014; Kenyon and Green 2013, 2014a,b). Here, we extend the hedging framework of Burgard and Kjaer (2011b, 2013a) and Kenyon and Kenyon (2013) to price the capital requirements of

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