Swap Accrual P&L Versus Mark-to-Market P&L

Summary

The document distinguishes two ways of describing profit and loss on a receive-fixed interest rate swap. The first estimates accrual over a holding period by comparing the fixed coupon with the floating rates realized during that period. It describes the income or cost accumulated as time passes, using the average floating rate as a simplified estimate.

The second approach applies DV01 to a change in market yields to estimate mark-to-market P&L. This measures the change in the swap’s value based on the rate at which the position could be valued or unwound, rather than the coupons earned during the holding period. The example’s accrual calculation and rate shock therefore refer to different P&L components and scenarios. The explanation is conceptual and simplified: actual swap P&L can also reflect curve movements, changing sensitivity, discounting, payment timing, and other valuation effects.

Key ideas

• Accrual P&L reflects coupon and floating-rate cash flows over the holding period.
• DV01-based P&L estimates the value change associated with a market-rate move.
• Accrual and mark-to-market P&L describe different effects and should not be compared as the same calculation.
• A DV01 shock is a simplified estimate whose accuracy depends on the size and nature of the rate move.

Tags

# Interest rates swap P&L


# Interest rates swap P&L












I heard about different ways of estimating the PnL of an IRS. Say I receive through a 10y swap where fixed is 5%, I hold the position for 1 year time.

- you pay float and receive fixed so estimate PnL = (coupon - avg_float_rate during the year ) * notional

Say float has been 3% for first 6 months and then 1% for the last 6 months of the trade PnL = ( 5 - avg (3,1)) * notional = (5 -2)* notional

- PnL = Dv01 * bp,

say 10y fell 10bp and Dv01 = 500k, PnL = 10 * 500k = 500k

Can you please explain what the differences are between the 2 approaches?

## Answer by AMach (score 2)

https://quant.stackexchange.com/a/85239

These are two completely different scenarios. In 1 an entire year went by so you're estimating your accrual PnL over the course of the entire year. In 2 you're shocking your swap received position by 10 bps and seeing your "Mark to Market" PnL.

Your accrual PnL is useful if you're trying to understand how your position will carry over some period of time. Your mark to market is your unrealized gain/loss as a result of where the market is willing to take you out of that position.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.