The Hypothetical P&L is the P&L that would have resulted if the portfolio had stayed con- stant over the period in question ; thus, it excludes both trading revenue and fee income. ... For our purposes, we consider two types of Hypo- thetical P&L: Market and Model.
What is theoretical P&L?
“Risk-theoretical P&L: The daily desk-level P&L that is predicted by the risk management model conditional on a realisation of all relevant risk factors that enter the model .”
What is risk based P&L?
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 ...
What is P&L attribution test?
The profit and loss attribution test is one of two regulator-set tests that a bank’s trading desk must pass in order to use the internal models approach for market risk capital calculations . The gap between the two P&Ls is measured using a mean ratio as well as a variance ratio. ...
What is clean PNL?
Clean P&L’s are hypothetical P&L’s that would have been realized if no trading took place and no fee income were earned during the value-at-risk horizon . The Basel Committee (1996) recommends that banks backtest their value-at-risk measures against both clean and dirty P&L’s.
What is VAR backtesting?
The value at risk (VAR) is a statistical risk management technique that monitors and quantifies the risk level of an investment portfolio. ... Backtesting, which uses historical data to test how well a strategy would perform, is used to measure the accuracy of value at risk calculations .
What is FRTB regulation?
The Fundamental Review of the Trading Book is an international standard that sets out rules governing capital banks must hold against market risk exposures . ... Banks can either use their own internal models or a standardised approach to calculate capital under FRTB.
How is P&L calculated?
A profit and loss statement is calculated by totaling all of a business’s revenue sources and subtracting from that all the business’s expenses that are related to revenue . The profit and loss statement, also called an income statement, details a company’s financial performance for a specific period of time.
How do you calculate daily P and L?
Daily P&L calculation: (current price – prior day’s closing price) x (total number of outstanding shares) + (New Position calculation for all new positions) + (Closed Position calculation for all closed positions). Closed Position calculation: (trade price – prior day’s closing price) x (total number of closed shares).
What is unrealized P&L?
The unrealized P&L is a reflection of what profit or loss could be realized if the position were closed at that time . The P&L does not become realized until the position is closed.
What is day P&L?
PROFIT/LOSS (P/L) DAY: P/L Day is the amount of money made or lost on your position from last night’s close to the current mark plus any intra-day profit and loss . ... It includes the P/L for all open positions and any closed positions made for a specific stock or index done in a calendar year.
What is profit attribution analysis?
It’s short for ‘Profit and Loss Attribution’ and it’s a back-testing method for evaluating a bank’s risk management models . It compares a bank’s hypothetical profit and loss as predicted by that risk management model with the actual profit and loss incurred.
What is RTPL FRTB?
The RTPL is the daily trading desk-level P&L that is produced by the valuation engine of the trading desk’s risk management model. ... The RTPL must not take into account any risk factors that the bank does not include in its trading desk’s risk management model.
How is VaR backtesting done?
Risk managers use a technique known as backtesting to determine the accuracy of a VaR model. Backtesting involves the comparison of the calculated VaR measure to the actual losses (or gains) achieved on the portfolio . ... For a one-day VaR measure, risk managers typically use a minimum period of one year for backtesting.
What is the purpose of backtesting?
Backtesting is the general method for seeing how well a strategy or model would have done ex-post . Backtesting assesses the viability of a trading strategy by discovering how it would play out using historical data.
What is expected shortfall method?
Expected shortfall is calculated by averaging all of the returns in the distribution that are worse than the VAR of the portfolio at a given level of confidence . For instance, for a 95% confidence level, the expected shortfall is calculated by taking the average of returns in the worst 5% of cases.
