Chapter 6: Margin Valuation Adjustment (MVA)

In Chapters 3 and 4, we have discussed about FVA. FVA is the funding cost related to derivatives trading. Here, funding is necessary for collateral margin and/or cash flows from derivatives. Collateral margin here is (a function of) exposure of derivatives. This collateral margin is called Variation Margin (VM). In addition, there are certain important circumstances where Initial Margin (IM) is posted on top of VM in derivative trading. VM protects derivative counterparties from loss with the amount of positive exposure when the opposite counterparty defaults. On the other hand, IM protects counterparties from potential losses from market movements in the Margin Period of Risk (MPOR) (i.e. the short period of time required for margin to be posted in response to market moves). MPOR is well captured by VAR, SVAR or Expected Shortfall…