Module 16 · Advanced
The XVA family
Textbook models give a derivative one clean, risk-free price. The real world charges for everything that clean price ignores — a whole stack of valuation adjustments, collectively XVA. CVA (last module) is just the first:
- CVA — the cost that your counterparty might default (a charge).
- DVA — the mirror: that you might default. Counts as a benefit — controversially, you “gain” from your own credit risk.
- FVA — the cost of funding an uncollateralized position on your balance sheet.
- MVA — the cost of funding the initial margin you must post.
- KVA — the cost of holding regulatory capital against the trade over its life.
Add them up and a “fair value” of zero can cost the bank real money — so it's built into the price you're quoted. Computing XVA across an entire trading book (millions of trades, thousands of simulated paths, netting sets, collateral) is one of the largest and most compute-heavy jobs on a modern derivatives desk. Size each one below and watch the all-in cost.
🎛 XVA waterfall
A textbook “fair value” of $0 on this swap really costs the bank -$130,000once every adjustment is counted — so that's baked into the price you're quoted.
Classical pricing gives a derivative one clean value. Reality adds a stack of valuation adjustments (XVA): CVA (counterparty default), DVA(our own default — a controversial “benefit”), FVA (funding the position), MVA (funding initial margin), and KVA (holding regulatory capital). Together they can move a price by basis points to percent, and computing them across a whole trading book is one of the biggest jobs on a modern derivatives desk. Educational tool — not investment advice.
Things to try
- • Turn every adjustment to zero, then add them one at a time — see how the “fair” price drifts away from clean.
- • Notice DVA is the only green (positive) one — the accounting benefit of your own default risk.
- • Scale the notional up — a few basis points of XVA becomes a very large dollar number.