PEP - Trade Type Reference

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PnL Explained	CTRM Software	Statistics

Trade Type Reference

Overview

This is the main page of the PnL Explained Professionals Trade Type Reference. The reference contains the information about a number of trade types that PnL Explained Professionals may encounter. Some people use ‘instrument type’, ‘deal type’, ‘security type’ instead of the term ‘trade type’, which is the term we use here.

Trade Types

#	Item
1	Commodity Forward
2	Commodity Swap
3	Interest Rate Swap

Information Includes

Item

Description

Name

The trade type

Derivative?

A ‘yes’ or ‘no’ to indicate whether or not people generally consider this type of trade to be a derivative, meaning that its MTM is based on (i.e., derived from) some other item.

Description

A description of the type of trade

Example

An example of the type of trade

Reason to Buy

Reasons why someone might want to be the buyer of this type of trade, i.e., reasons other than speculation. I.e., Why someone might, for example, want to use a derivative to hedge a position.

There is a concept called a ‘natural long’ or ‘natural short’. Long/short in this context means you benefit if the market goes up or down.

For example, if you are a farmer growing crops you benefit if the price of your crop goes up. This makes you long the commodity and you are a ‘natural’ because just being in the business you are in exposes you to the market (i.e., you make or lose money if/when the market price changes). So, for example, a farmer, being a natural long, may want to buy a put option on the price of the underlying commodity to protect (i.e., to hedge) himself/herself against financial losses due to the price of the commodity going down. The farmer would have a ‘reason to buy’ the put option.

Reason to Sell

Reason why someone would want to be a seller of this type of trade. As with the ‘reason to buy’ we are providing reasons other than speculation that the price will go up or down. ‘Reason to sell’ is listed separately from ‘reason to buy’ since the reasons can be different and be applicable to different groups of people.

MTM Valuation

How to value this type of trade

PnL Explained Attributes

This is a list of the most common PnL Explained attributes and a ‘yes’ or ‘no’ indicator as to whether or not they are typically applicable for this trade type.

For example, for options, the list of attributes would include ‘Impact of Volatility’ (valuation changes caused by changes in volatilities) while that attribute would not be applicable for a commodity futures contract.

The common PnL Explained Attributes are:

#	Attribute	Comments
1	Impact of New Trades
2	Impact of Amendments	Changes to existing trades, i.e., if the trade was originally entered incorrectly.
3	Impact of Cancelations	If the trade was canceled, e.g., if it was originally entered incorrectly.
4	Impact of Time	Change in value due to the date changing from prior day to today
5	Impact of Interest Rates	See comments for Impact of Commodity Prices.
6	Impact of Commodity Prices	This is sometimes reported in as one attribute ‘Impact of Commodity Prices’ (using the revaluation method) and sometimes reported as multiple columns (using the sensitivities method): 1) Impact of Commodity Delta - First order price effects 2) Impact of Commodity Gamma – Second Order Price Effects See here PnL Explained FAQ for more information on Revaluation vs. Sensitivity Method and Impact of Delta, Impact of Gamma 3) When using the sensitivities approach, spread options and swaptions may have ‘Impact of Cross Gamma’. This is PnL due to the effect of two prices changing (from one day to the next) simultaneously vs. changing them separately (i.e., just one at a time). For more information on ‘Impact of Cross Gamma’, see Glossary
7	Impact of Volatility	See comments for Impact of Commodity Prices.
8	Impact of Cross Price/Volatility	PnL Caused by moving commodity prices and volatilities (i.e., the change from one day to the next) simultaneously versus the sum of the PnL due to prices and volatilities moving separately. Note that you get PnL due to cross price/volatility effects with both the revaluation and the sensitivities approach. For more information on ‘Impact of Cross Price/Volatility’, see Glossary
9	Impact of Spot FX	FX meaning foreign exchange rates and in this case we are talking only about spot (meaning current) FX rates, not forward (in the future) FX rates
10	Impact of Correlations	When using the sensitivities approach, you can have first order, second order, and cross effects for changes in correlations. It is unusual for PnL Explained reports to include second order and cross effects for correlations, so we didn’t include them in this chart (for each trade).

Notes:

1) Note that some attributes that are listed are common for all trade types, such as PnL due to new trades, i.e., trades booked on the current day. Even though these items are applicable for all trade types, we decided to include them for increased clarity.

2) For the purposes of this chart, we are assuming that all trades are in the native currency of the organization. E.g., for a company in the United States, that would be USD (U.S. Dollars). Some trades by definition have more than one currency, such as ‘FX’ trades, so they’ll have ‘Impact of Spot FX’ indicated as ‘Yes’.

Said another way, you could do an interest rate swap trade in USD if your native currency is USD or you could do an interest rate swap trade denominated in EUR if your native currency is USD. For the Euro trade, you would have exposure to the Spot FX rate of USD / EUR if you mark your Euro trade to USD each day. However, the above chart is shown from the point of view of valuing a deal in its native currency so it would have ‘Impact of Spot FX’ set to ‘no’ for interest rate swaps.

Additional PnL Explained Attributes

Some trade types have additional attributes, i.e., others not listed in the above list of common attributes. These additional attributes are listed separately.

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