Article: The Profit and Loss Equation in Compressions | A Short Video

08 February 2016 | Diana Higgins

Shrinking a portfolio of transactions is about keeping the same profits and price risk while reducing those side effects that derivative trading firms have to deal with after a transaction is executed: operational, credit and regulatory risks. The profit and losses (P&L) that happened in the past, is usually referred to as the "Realised P&L". Earnings to be made in the future are called "Unrealised P&L". These two components add up to the total profits and losses in a portfolio.

[Realised P&L + Unrealised P&L]Before compression ≈ [Realised P&L + Unrealised P&L]After compression

Source: The Profit and Loss equation is explained in Chapter 6 of the book Portfolio Compression (see link below for a 20% discount offer for OTC Space readers)

This video explains the equation that should be kept in the minds of those involved in compressions. The equation ensures that profits stay the same before and after reducing transactions in a portfolio.

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