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From the perspective of an XVA desk, what does the NPV actually tell you in terms of Counter-party Credit Risk? I understand that CVA + DVA gives you the NPV of any given trade (at the simplest level), But what does that mean? As an example, if I have an underlying trade of an interest-rate swap and the XVA desk decides to place a CVA trade on this interest rate swap because they think one of the counter-parties involved is at a high default risk, Does the NPV of the child trade (XVA) show that the XVA desk will profit or is it more of a gauge of what they can charge the rates desk internally? Sorry if this is the wrong forum for this but I’m trying to wrap my head around how these Desks make money and what positive CVA/DVA actually correlate to.

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The NPV of a trade done by the CVA desk seems like a red herring. After all, a typical trade done by them is to buy a CDS on the counter party as reference entity, but like all derivatives trades this starts at zero value.

CVA desks make money by charging internal desks a little bit more than the cost of their hedge. For example if the CDS of the counterparty trades at 100bp, perhaps they charge the internal desk 110bp, to account for transaction costs and rebalancing risk.

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