P&L, P&L Var what, how, when, where

Been quite busy recently (and I am still!), but as promised here are some good pointers to help you out (hopefully).

P&L , the recipe for success!

First step in this post is to ensure that everyone is aligned how P&L is computed in Murex.

P&L is simply the sum of Past Cash, Future Cash and Market value. Sounds easy! Past Cash can be a simple of the past cash (and that’s probably the best way to look at it) or you can have Murex compute a theoretical financing, where past cash is actually capitalized.

Future cash is usually short dated. You can look at them either as non discounted or discounted. In this case, it makes usually more sense to discount them (do you prefer 100 Euros today or in 1 year time?)

Market value is the value of the trade as of settlement date (theoretical settlement date). You can also look at the discounted market value which is back to today.

That’s how most people look into P&L, then you have further breakdown: realized/unrealized, revenue/capital. If you have questions let me know!

P&L Var … Where does my P&L come from

Alright, this is the best part of the PL tool in Murex. From simulation you can run the PL Var tool (it can also then be set in a dynamic table, but start with the simulation, easier to play with).
Normally you should have some default scenarios or you can also look at the doc (pretty good!) but let’s drill down into the available options:

  • Theoretical P&L Var. That’s the one most traders are after, it’s fast and usually a good tool. In order to estimate the P&L variation, you simply take the variation of market data multiplied by the sensitivity (you can also add second order effect which takes into convexity). Usually traders like this mode as they have direct control (hopefully!) over their sensitivities and if they lose or make money overnight, they want to be able to attribute it to market data variation.
  • Actual P&L Var. This one is accurate but much much slower. Basically Murex loads the portfolio as of the day before and replays all actions (that you choose as part of the PL var setup): not only market data but events also (trade insertion, trade modification, fixings, etc…). Depending on the order of the steps, you will get a slightly different attribution for every step (if you put spot variation before rate curve changes, etc…). You can also choose to reset the PL after each step but then the total of all steps will not be equal to the PL variation between yesterday and today. Finally, you have the last bit: Global other. This should be the last step in your scenarios. It is the difference between the the computed PL variation with the scenarios and the actual variation between the 2 dates.

The best part of the Theoretical P&L Var is that you can display the market data for the 2 dates, as well as the sensitivities and convexities. So everything is available and make it easy to “debug” any unexpected jump.

One last thing: test, test and retest the PL var, there are often exceptions, some cases are also complex (like your vol smile sensitive to the rate curve) and in case you are using the actual PL var, just ensure that your global other is always very small (unfortunately not always so easy)

Knees deep in the problems

Hurt me plenty

Quite busy at the moment, running low on bullets and might have to revert back to chainsaw soon. We’re reaching a critical stage in the project and not so much time left.

So I’ll update the blog when I can till the project is finished (should not be much longer). Questions and so on should be fine to answer.

And yes, this is quite old school but good memories!