Calypso’s R&D team explains the role of MVA.
The concept of funding value adjustment (FVA) – the cost over-and-above the risk-free rate incurred by the institution to fund derivative positions – is now well-known by the market. It arises primarily due to the asymmetry in the funding of uncollateralized client trades versus the hedges that are executed in the professional market under two-way zero threshold collateral support agreements (CSA).
What has received little attention are the additional funding costs associated with initial margin (IM) in the context of central clearing and bilateral collateralization. This article shows that when trades are collateralized, the FVA is still present but there is an additional adjustment, namely margin value adjustment (MVA). This is the cost of funding the initial margin.