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PnLExplainedWikipedia

PnLExplained
FromWikipedia,thefreeencyclopedia

PnLExplainedalsocalledP&LExplain,P&LAttributionorProfitandLossExplainedisatypeofreport
commonlyusedbytraders,especiallyderivatives(swapsandoptions)tradersandproducedbyProductcontrol,
thatattributesorexplainsthedailyfluctuationinthevalueofaportfoliooftradestotherootcausesofthe
changes.
P&Listhedayoverdaychangeinthevalueofaportfoliooftradestypicallycalculatedusingthefollowing
formula:PnL=ValuetodayValuefromPriorDay

Contents
1 Report
2 Methodologies
2.1 Sensitivitiesmethod
2.2 Revaluationmethod
3 PnLUnexplained
4 Externallinks
5 References

Report
APnLExplainedReportwillusuallycontainonerowpertradeorgroupoftradesandwillhaveataminimum
thesecolumns:
Column1:PnLThisisthePnLascalculatedoutsideofthePnLExplainedreport
Column2:PnLExplainedThisisthesumoftheexplanatorycolumns
Column3:PnLUnexplainedThisiscalculatedasPnLPnLExplained(i.e.,Column1Column2)
Column4:ImpactofTimeThisisthePnLduetothechangeintime.
Column5:ImpactofPricesThisisthePnL,i.e.,thechangeinthevalueofaportfolioduetochanges
incommodityorequity/stockprices
Column6:ImpactofInterestRatesThisisthePnLduetochangesininterestrates
Column7:ImpactofVolatilityThisisthePnLduetochangesinvolatilities.Volatilitiesareusedto
valueOption(finance)(i.e.,callsandputs)
Column8:ImpactofNewTradesPnLfromtradesdoneonthecurrentday
Column9:ImpactofCancellation/AmendmentPnLfromtradescancelledorchangedonthecurrent
day

Methodologies
TherearetwomethodologiesforcalculatingPnlExplained,the'sensitivities'methodandthe'revaluation'
method.

Sensitivitiesmethod
TheSensitivitiesMethodinvolvesfirstcalculatingoptionsensitivitiesknownastheGreeksbecauseofthe
commonpracticeofrepresentingthesensitivitiesusingGreekletters.Forexample,thedeltaofanoptionisthe
valueanoptionchangesduetoa$1moveintheunderlyingcommodityorequity/stock.Tocalculate'Impactof
Prices'theformulais
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PnLExplainedWikipedia

ImpactofPrices=OptionDelta*PriceMove
soifthepricemoves$100andtheoption'sdeltais0.05%thenthe'ImpactofPrices'is$0.05.

Revaluationmethod
TheRevaluationMethodrecalculatesthevalueofatradebasedonthecurrentandthepriorday'sprices.The
formulaforImpactofPricesusingtheRevaluationMethodis
ImpactofPrices=(TradeValueusingToday'sPrices)(TradeValueusingPriorDay'sPrices)
forsomesmallvalueassetssuchasloosetools
Depreciation=valueatthebeginningoftheyear(openingbalance)+purchasesintheyearvalueatthe
endoftheyear(closingbalance)

PnLUnexplained
PnLunexplainedisacriticalmetricthatregulatorsandproductcontrolwithinabankalikepayattentionto.
PnLAttributionisusedtotestthehypothesisthattheriskfactorsidentifiedforariskypositionaresufficientto
materiallyexplainthevaluechangeexpectedfromtheriskyposition.Suchthatifpositionsensitivitiestothose
riskfactorsarecalculated,thenthevaluechangeobservedoveradaycanbeattributedtothemarketprice
changeofthoseriskfactors,withthemagnitudeoftheestimatedasasumproductoftheriskfactorsensitivities
andthecorrespondingdailyriskfactorpricechange.
AnyresidualP&Lleftunexplained(PnLUnexplained)wouldbeexpectedtobesmallIFtheidentifiedrisk
factorsareindeedsufficienttomateriallyexplaintheexpectedvaluechangeofthepositionANDifthemodels
usedtocalculatesensitivitiestotheseriskfactorsarecorrect.PnLUnexplainedisthusacriticalmetricthat
whenlargemayhighlightinstanceswheretheriskfactorsclassifiedforariskypositionareincompleteorthe
modelsusedforsensitivitiescalculationsareincorrectorinconsistent.[1]

Externallinks
PnLExplainedProfessionals(http://www.pnlexplained.com/index.html)Informationandexamplesfrom
PnLExplainedProfessionalsAssociation'shomepage
Pantz,Julien2013PnLpredictionunderextremescenarios(http://papers.ssrn.com/sol3/papers.cfm?abstr
act_id=2281873)

References
1."WhyP&LAttribution?Orjudgingweathermen...".AcuityDerivatives.Retrieved10September2012.

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