Options, Futures, and Other Derivatives, 10th Edition

9.2 FVA AND MVA

The funding valuation adjustment (FVA) and margin valuation adjustment (MVA) are adjustments to the value of a derivatives portfolio for the cost of funding derivative positions. To illustrate how they might arise, suppose that a derivatives dealer, Bank A, is in the situation illustrated in Figure 9.1. It has entered into a five-year interest rate swap with a corporate end user and has hedged its risk by entering into an exactly offsetting swap with another dealer, Bank B. It appears that Bank A has locked in a profit of 0.1% per year because it receives 3% from Bank B and pays 2.9% to the end user. We suppose that the transaction between Bank A and Bank B is cleared through a CCP with both sides posting initial margin and variation ...