P&L Explain and Attribution
P&L explain decomposes daily profit and loss into risk-factor moves, new trades, and residuals.
P&L explain compares today’s P&L to what would be expected from yesterday’s Greeks and observed market moves.
A clean decomposition separates market-driven P&L, carry and time decay, trade changes, and unexplained residuals.
The analytics framework must provide consistent risk factors and valuations for P&L explain to be meaningful.
Large unexplained P&L signals model, data, or booking issues and is a key control for trading and risk.
This waterfall decomposes one day of P&L into market move, carry, new trades, and residual. Use the controls to change total P&L and the size of systematic components and see how large the unexplained bucket becomes.
P&L explain asks a very concrete question: given yesterday’s Greeks and today’s market moves, plus known trade changes, what P&L should we have seen?The difference between this expected P&L and the realised figure is the residual.
A small, noisy residual is healthy and reflects model miss and higher-order effects. A large, persistent residual hints at deeper issues: stale data, booking problems, wrong risk factors, or structural model deficiencies. Effective control frameworks monitor that residual line as closely as the headline P&L.