I am interested to know what the current market practice is around putting aside reserves around derivatives trades. If for example a trader sells a large derivative trade and the difference between the theoretical value and price sold is $1m, how much of this can be claimed as Day 1 PnL and how is the rest released to the trader (or not) and using what methodology. I suspect different banks have different approaches and they may also depend on the asset class and trade type. It would be interesting to hear what they might be.
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$\begingroup$ Accounting regs give limited scope for provisioning p&l from a derivative transaction - its too easy for a provision to look like tax avoidance for example. So most of this is answered by your local accounting / tax code $\endgroup$– river_ratCommented Feb 28, 2023 at 20:40
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