P&L Attribution

Yesterday’s profit, accounted for line by line

P&L attribution — the explain — decomposes a day’s profit or loss into the risk factors that produced it: so much from the market direction, so much from gamma, so much from volatility, so much from time. What is left over is the unexplained, and it is the most closely watched number on the report, because an explain that does not tie out means a mark, a model or a risk figure is wrong and nobody yet knows which.

Open in the app · Risk & the Greeks · advanced

Risk & the Greeks is part of the OTC Learn subscription. Everything the app shipped with — 36 products across six asset classes — stays free.

What the lesson covers

1. What it is
2. The lines
3. Why it’s used
4. Three definitions of P&L
5. Risks to watch

Key terms

• Explain — The decomposition of a day’s P&L into the risk factors that produced it.
• Unexplained P&L — The residual between actual profit and what the risk factors account for.
• Hypothetical P&L — Yesterday’s portfolio revalued on today’s market data, with no intraday trading or fees.
• Risk-theoretical P&L — The profit the risk model predicts from its own risk factors and sensitivities.
• Carry — The funding, borrow and roll-down component of a day’s P&L, separate from market moves.
• Day-one P&L — Profit recognised when a trade is booked, on a model price rather than an observed one.

In practice

Every bank trading desk produces an explain daily, and under the Basel market risk framework the comparison between hypothetical and risk-theoretical P&L decides whether a desk may use its own model for capital at all. It is one of the few places where a risk-management practice and a capital rule are the same exercise.

Read next

• Delta and Gamma — The hedge, and how fast the hedge goes stale
• Vega and the Volatility Surface — What a book loses when volatility reprices
• Value at Risk — One number for tomorrow’s loss, and what it leaves out

In the app, P&L Attribution carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.