In this work Massimo Morini and Andrea Prampolini argue that KVA is a component of profit turned into a valuation adjustment as a by-product of regulatory constraints based on a conservative consideration of market hedges. The regulatory foundations of KVA are analyzed from RWAs to the Leverage...

We show that when a derivative portfolio has different correlated underlyings, hedging using classical greeks (first-order derivatives) is not the best possible choice. We first show how to adjust greeks to take correlation into account and reduce P&L volatility. Then we embed...