I am wondering how the IRS daily PnL will normally be attributed from trader's/market risk perspective.

Will it be broken down into three parts daily carry (Daily interest accrual), daily roll-down (Assuming static yield curve rolling down one day) and the daily change in yield curve (Any remaining change in the NPV) or there are other kinds of attribution?

Thank you.


1 Answer 1


Regarding the P&L impact of

daily change in yield curve

For a linear product, you want to view this in multiple ways:

1- for each hedging/fitting instrument, you had this much delta to this instrument (or key rate duration if you prefer), and the instrument moved that much, and we just multiply the delta sensitivities by the changes for 1st order Taylor analysis

2- for more insight, explain the movements of the yield curve in terms of its historical Principal Components (PC; typically, the first 3), and attribute the P&L to the PCs and to any curve movement not explained by the first 3 PCs.

Second order risks may help reduce the unexplained P&L (UPL) even for swaps that we normally think of as linear products. If your swaps have 20+ years to maturity, then you should consider the interest rate gamma. It would be more accurate to view the gamma as a tenors$\times$tenors matrix, but you can use a single number, risk-weighted by the deltas.

Cross-gammas between interest rates and the time are not very material, but may help further minimize the UPL if you wish.

If you use interest rate futures, rather than swap rates, to build the short end of your curve, then you may want to see the factor sensitivities and the P&L explain using both the interest rate futures and the swap rates.

Although this is seldom needed, it is good to be able to quantify the P&L impact of environment/model changes, such as change in calendars, e.g. a Queen's funeral or a new King's coronation in London or a day of mourning for a former president in the U.S.


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