KVA: Capital Valuation Adjustment

Andrew Green, Chris Kenyon and Chris Dennis
February 20, 2014
Version 1.0

Abstract
Credit (CVA), Debit (DVA) and Funding Valuation Adjustments (FVA)are now familiar valuation adjustments made to the value of a portfolio ofderivatives to account for credit risks and funding costs. However, recent
changes in the regulatory regime and the increases in regulatory capital requirements has led many banks to include the cost of capital in derivativepricing. This paper formalises the addition of cost of capital by extending
the Burgard-Kjaer (2013) semi-replication approach to CVA and FVA to
include an addition capital term, Capital Valuation Adjustment (KVA).

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