FVA, or Funding Value Adjustment, is the correct term for the adjustment made to ensure that a dealer recovers its average funding costs when trading and hedging uncollateralized derivatives. This adjustment is crucial in the world of derivatives trading and hedging, as it helps dealers manage their funding costs effectively. The FVA can also be viewed as a hedging cost or benefit that arises due to the mismatch between an uncollateralized client trade and a collateralized hedge in the interdealer market. This adjustment is designed to ensure that the dealer's funding costs are adequately covered, thereby reducing the risk of financial loss.

Choice A is incorrect. CVA or Credit Value Adjustment is a price adjustment that accounts for the counterparty credit risk in derivative valuations. It does not specifically refer to the recovery of average funding costs.

Choice B is incorrect. DVA or Debit Value Adjustment refers to the adjustment made by an institution when it calculates its own credit risk in relation to its liabilities, which again does not pertain to the recovery of average funding costs.

Choice D is incorrect. Marking to market refers to accounting for the fair value of an account that can change over time, such as assets and liabilities, rather than its initial cost. This concept doesn't directly relate with adjustments made for recovering average funding costs in derivative trading and hedging.

Things to Remember

• FVA (Funding Value Adjustment) is specifically designed to reflect the funding costs a dealer incurs in the process of trading and hedging derivatives.
• This adjustment is key in aligning the pricing of derivatives with the actual costs of maintaining these positions, especially in uncollateralized trades.
• FVA plays a pivotal role in ensuring that the pricing of derivatives is not only market-reflective but also inclusive of the dealer's funding realities.
• The relevance of FVA has grown in derivatives markets as a response to the increasing recognition of funding costs in trade valuations.
• Effective management of FVA can significantly impact the profitability and risk profile of a dealer's derivatives business.