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- W3116408974 abstract "In this article we derive the shareholder loss due to a capital requirement associated to a derivatives transaction. This is a result of a transfer of wealth between shareholders and creditors of the firm. The charge required to negate this loss can be regarded as a capital valuation adjustment which we refer to as KVA2. Our approach does not assume a fixed hurdle rate on equity required by shareholders. Instead we derive the economic return on capital for a marginal derivatives trade. We provide two complementary derivations of the valuation adjustment. The first is based on a Merton single-period balance sheet model and the second on continuous time no-arbitrage arguments.Our resulting KVA expression is similar in structure to those proposed in the literature. We find however that the effective rate on capital that a shareholder should demand in a derivatives transaction is a junior funding rate as opposed to the return on equity. This is a consequence of the fact that the only risk a shareholder faces once a derivatives transaction is fully hedged is the default of the firm itself." @default.
- W3116408974 created "2021-01-05" @default.
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- W3116408974 date "2019-01-01" @default.
- W3116408974 modified "2023-10-14" @default.
- W3116408974 title "KVA as a Transfer of Wealth" @default.
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- W3116408974 doi "https://doi.org/10.2139/ssrn.3484997" @default.
- W3116408974 hasPublicationYear "2019" @default.
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