KVA: banks wrestle with the cost of capital
As the bank capital burden grows, dealers are trying to price in the associated costs
In principle, derivatives pricing adjustments are simple, sensible things, and capital valuation adjustment (KVA) is no different. The newest addition to the family – known collectively as XVAs – reflects the capital a trade consumes over its lifetime, which is an obvious source of cost or benefit, and large dealers are increasingly incorporating it in their prices.
"You can't really fly blind in this regulatory environment; it is not very forgiving," says the head of the XVA desk at a leading
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