At least once a week someone at the dealers tells me that the swap curve is moving due to CVA hedging. Can someone explain how this works? I can imagine that CVA would move CDS levels, but why does it affect rates?

'Cause they need to replace the risk that is likely to disappear if their cpty, with whom they have a one-sided CSA, goes down. I think that's the simple explanation.

QuoteOriginally posted by: Martinghoul'Cause they need to replace the risk that is likely to disappear if their cpty, with whom they have a one-sided CSA, goes down. I think that's the simple explanation.How common are one sided CSAs?

I would say that a change in CDS spread moves CVA adjustment of the swap. You can imagine CVA adjustment like a spread in the swap, once you change spread your delta changes, so you hedge it and as a consequence it may move curve. However, I would expect that it has second order effect unless there is not enough liquidity. One-sided CSA is common when you lend to the sovereigns, the central banks and the supranationals.

CVA is a complex option-like payoff. The portfolio is the underlying. When underlying moves, CVA moves. At least more than 60% of credit exposure is driven by swaps.

CVA trading desks are hedging the entire Bank's CVA they hold by definition, in order to keep the whole package (CVA + hedging) as stable as possible. Hedging CVA can be done by hedging the counterparties (CDS) and the underlying exposures (rates, commodities, FX etc.). Most of the Banks' exposure is made of swaps. This is why, due to heding of the exposure, the swap curve moves a lot.

I often hear comments about CVA desks, and they always seem to be in receiving 30y EUR swaps. Anyone care to explain why they are always the same way, and why this part of the curve?

That's the liquidity point in the mkt that's closest to the duration of the risk they want to hedge. At least that's my understanding.

QuoteOriginally posted by: MartinghoulThat's the liquidity point in the mkt that's closest to the duration of the risk they want to hedge. At least that's my understanding.Why do sovreigns want to do such long dated swaps?

QuoteOriginally posted by: MartinghoulThat's the liquidity point in the mkt that's closest to the duration of the risk they want to hedge. At least that's my understanding.Is there a technical reason why they are so exposed to that part of the curve?

'Cause the trades they did originally were quite long-dated. Why did they do those trades in the first place? I dunno, but I guess it was where the other side (Dutch PFs) was readily available.

Sorry, I'm busy trying get a grip on some concepts around CVA and any help would be greatly appreciated. You enter into a swap with a counterparty, but that swap is actually not the whole swap, it's the risk free swap + CVA * pd portion.In practice, you can either enter into a contract of to cover the PD portion (e.g. CDS), proportional to size of CVA? Alternatively, with another counterparty, you could trade a smaller portion of the swap, to cover you in the case of deault from other counterparty. This is like CVA/exposure portion, but proportional to PD. As default becomes more and more likely you trade into more of the swap with other counterparties?I've asked a vaguely related question in Student I'd appreciate any help with CVA VaR - elligible hedgesI assume exposure hedges as per would fall into the inelligible category and CVA default hedges into the ellgible category (from a CVA VaR perspective)?