PelatihPrudent valuation values fair-valued positions at the price at which the bank is 90% confident it could exit them. The additional valuation adjustments (AVAs) are the differences between fair value and prudent value, by category (market price uncertainty, close-out costs, model risk and others); they are deducted from common equity.
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Example 27.12 (The AVA of the book)
With contributors’ volatilities dispersed by 2.0 and 2.5 basis points around the consensus, the market price uncertainty AVA, fair value less the 90% confidence exit value, is USD 190 578 for the payers and 232 964 for the receivers; summed after the 50% aggregation factor, 211 771. The simplified approach, 0.1% of the absolute fair values (USD 6.87 million), would give 6 872: for an option book whose value is small against its risk, the simplified figure understates the uncertainty.