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XVA (Valuation Adjustments) is a collective term that refers to a series of adjustments made to the valuation of derivatives and other financial instruments to account for various risks and costs. The most common components include Credit Valuation Adjustment (CVA), Funding Valuation Adjustment (FVA), and Collateral Valuation Adjustment (ColVA). These adjustments help financial institutions more accurately assess the fair value of derivatives by considering counterparty risk, funding costs, and the cost of collateral.
A bank trading interest rate swaps applies an XVA to adjust the fair value of the contracts, accounting for the potential risk that a counterparty may default and the funding costs associated with the transaction.
• A set of adjustments to derivative valuations for risks like credit, funding, and collateral.
• CVA accounts for counterparty credit risk, while FVA considers funding costs.
• Helps financial institutions assess the fair value of derivatives more accurately.
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