Risk factors impact on the P&L

University essay from KTH/Matematisk statistik

Author: Khawla Gougas; [2020]

Keywords: Profit and Loss P L ; risk factors; Greeks;

Abstract: Profit and Loss (P&L) explain analysis is an income statement produced by Product Control Team for traders to control the daily fluctuation in the value of a portfolio of trades to the root causes of the changes. This daily income provides users with a coherent breakdown of the drivers of P&L movements between two points in time with reference to a selected number of easily understandable pricing factors. P&L Attribution (also called P&L explain) can be calculated in two ways, either the risk based method or step re-evaluation method. This paper aims at understanding both methodologies from a theoretical point of view and shows the differences of both calculations methods and how they are interdependent in the daily work of a trader in the sense that both methods give a rational to the P&L from different perspectives. The risk based method involves the calculation of the trades sensitivities (also known as the Greeks) and then using them to predict the expected change in the P&L from one period to the next by using the actual market changes in the factors driving the transaction price over the same period and the transaction’s sensitivity to those factors. Whereas the re-evaluation method is calculated by aggregating the impact of different valuation scenarios and not on fixed sensitivities

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