PnL Explanation

• Use greeks or scenarios to analyse your PnL for vanilla and vol derivatives.
• Explain PnL on an instrument or portfolio level.
• For PnL explanation with greeks, use smart or BS greeks. Smart greeks produce a cleaner decomposition because they account for the spot-vol relationship.
• For PnL explanation with scenarios, re-price the portfolio under specific factor shifts (spot, vol, time, rates, model changes). Exact — no approximation.
• Breakdown of vol PnL into ATF (level), skew (slope), curvature, and unexplained — showing what changed about the vol surface, not just that “vol moved.”
• Consistently attribute PnL for both vanilla and vol derivatives.

Use PnL Explanation to:

• Spot errors: Inconsistencies between your risk system and valuation framework immediately surface as unexplained PnL.
• Attribute edge: Determine whether a desk’s P&L comes from the factors they intended to trade or from accidental unhedged exposure.
• Optimize execution: Run PnL attribution on fills at different horizons and for different counterparties to reveal which factors need hedging and when.
• Validate models: If Greek-based and scenario-based attribution broadly agree, your framework is consistent. Material divergence is itself diagnostic.

See also Event Var Fitter and Event Modeling for separating event-driven PnL from background volatility PnL.