What is XVA?

XVA is a family of valuation adjustments applied to the price of a derivative to account for credit, funding, capital, and margin costs. CVA, DVA, FVA, KVA, and MVA are the common members. The unadjusted mid-market price is not the price a dealer can book. XVA is the gap.

How does XVA work?

A desk first prices a derivative at mid-market, as if both sides were risk-free and funding were free. That number is a starting point. The desk then subtracts (or adds) adjustments for the risks it will actually carry if it does the trade.

Each letter is a different cost. CVA is the risk the counterparty defaults. DVA is the benefit if you default. FVA is the cost of funding an uncollateralized position. KVA is the cost of capital held against the trade. MVA is the cost of posting initial margin.

XVA vs market price

The screen price is not the bookable price. Two counterparties can see the same mid and still disagree after XVA, because their credit, funding, and capital costs differ. A smaller dealer often has to shade the price more than a larger one.

Does XVA move cash?

Not by itself. XVA is a valuation. Cash moves when you hedge, post margin, or realize a default. If you book a reserve for the adjustment, that reserve is a ledger post. The model that produced the number is not.

How it works with Blnk

Blnk does not compute XVA. Your risk engine does. If you set aside a reserve, post that amount to a named internal balance so the book shows the hold.

A reserve is a transfer from a P&L or capital account to something like @XvaReserve. When the position closes or the adjustment shrinks, post the release. Keep the model inputs in metadata. See internal balances.