Funding, margin and capital adjustments
CVA is only one of the adjustments a derivatives book carries. Funding the exposure costs money, posting initial margin costs money, and holding capital against it costs the most. This prices all three from one exposure profile, with and without a collateral agreement.
| Adjustment | Amount | Basis points | Driver |
|---|---|---|---|
| Funding cost (FVA) | $16,395 | 1.64 bp | 1.00% over OIS |
| Funding benefit (FBA) | -$10,071 | -1.01 bp | Receivable funding |
| Margin (MVA) | $46,257 | 4.63 bp | Initial margin funded |
| Capital (KVA) | $15,739 | 1.57 bp | Cost of equity |
| Total | $69,451 | 6.95 bp | FVA − FBA + MVA + KVA |
| Average EPE | $1,100,792 | — | hump |
| Average collateral | $753,635 | — | CSA applied |
All four adjustments are costs. The funding benefit is shown negative because it offsets the funding cost.
s_f · Σ EPE(t) · DF(t) · Δt · Funding the asset side.
s_b · Σ NEE(t) · DF(t) · Δt · Benefit on the liability side.
s_f · Σ IM · DF(t) · Δt · Initial margin is funded for the whole life.
k_e · Σ K(t) · DF(t) · Δt · K(t) = capital ratio × net exposure.
A clear path from inputs to results.
CVA is only one of the adjustments a derivatives book carries. Funding the exposure costs money, posting initial margin costs money, and holding capital against it costs the most. This prices all three from one exposure profile, with and without a collateral agreement.
How to use
- Set the notional, the peak expected exposure and the tenor.
- Choose the shape of the exposure profile.
- Enter the funding spread over OIS and the cost of equity.
- Set the capital ratio and the initial margin.
- Turn the CSA on and set the threshold, MTA and exposure volatility.
The formula
Reference: XVA framework: FVA/FBA (Albanese & Andersen), MVA and KVA as the cost of funding margin and capital.
Worked example
$100m notional, $8m peak EPE, 5 years, 1% funding
- Notional $100,000,000, peak expected exposure $8,000,000, tenor 5 years.
- Hump-shaped profile, funding spread 1% over OIS, discounting at 3%.
- Cost of equity 12%, capital 8% of exposure, initial margin 1%.
- CSA with a $2m threshold and a $250k MTA, exposure volatility $3m.
- 1
The hump profile averages $5.32m of EPE over the five years.
- 2
The CSA leaves $0.70m of collateral on average: the threshold, half the MTA and the margin soak up the rest.
- 3
FVA is $214,537 and the funding benefit on the liability side is $246,917, so net funding is a $32,380 benefit.
- 4
MVA on $1m of initial margin is $46,257; KVA at 12% of 8% capital is $205,956.
- 5
Total XVA is $219,833, or 22 basis points of notional.
Total XVA $219,833 · 22 bp · KVA is the surviving cost.
Interpreting the result
On a symmetric profile the funding cost and the funding benefit almost cancel, which is why net funding is small here. What survives is capital: a 12% return on 8% capital is nearly 1% of exposure a year, and it does not go away when the trade is hedged. That is why desks manage KVA as carefully as CVA.
Assumptions & limitations
- Flat funding spread and deterministic discounting; no collateral optionality.
- CSA exposure is available as a closed form or applied path by path with a margin period of risk.
- A netting set sums the trades inside each path before the positive part is taken.
- Initial margin is funded for the whole life at the funding spread.
- Capital is proportional to the net exposure, not to a regulatory RWA calculation.
Frequently asked questions
Why is the net funding benefit negative here?
The profile is symmetric, so the funding benefit on the liability side exceeds the cost on the asset side. In practice a desk only gets the benefit where it can actually reinvest collateral.
Why does KVA dominate?
Because capital is held on the whole net exposure for the whole life, and the cost of equity is several times the funding spread. A 12% return on 8% capital is close to 1% a year.
What does a tighter CSA do?
It cuts the funding cost and raises the collateral operations burden. The threshold and MTA are the two dials that trade those off.
How does this relate to CVA?
CVA is the credit mark on the counterparty; FVA, MVA and KVA are the cost of financing the position. A trade can be CVA-neutral and still lose money on KVA.
Methodology last reviewed 2026-10-21. Results are informational and not financial or engineering advice — see our disclaimer.