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If NDF contract gets novated, will it change the pricing?

If NDF contract gets novated, will it change the pricing?

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It depends on how the desk has set up their accounting.

If the forward (or any other OTC trade) has a mark to market that does not include the counterparty exposure, capital, funding, etc; there are also a separate xVA charge that includes these things netted at a portfolio level, etc then the former doesn't change, but the latter may change ceteris paribus (if the novaton changes the counterpaty and is not offset by another novation in the portfolio).

If the xVA charge is somehow allocated into every OTC trade's MTM (so far I have not seen anyone do it in a transparent way that made sense to me:) then the forward's net MTM is the sum of the above risk-free forward and the allocated xVA. The latter may change, and therefore the net MTM can change.

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  • $\begingroup$ Thank you, what if Counter Party 1 has exposure to Counter Party 2 $\endgroup$ – user8371676 Dec 3 '20 at 19:55
  • $\begingroup$ If the MTM includes xVA allocation, then that portion can change in surprising ways because of interconnectedness. IMO the picture is clearer when they're separate, and xVA is for portfolio, not single trades. $\endgroup$ – Dimitri Vulis Dec 3 '20 at 20:31

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