Public Accounting |_________________________
Industrial Accounting |____________________________
Government and Not-for-Profit Accounting | ________________
Governmental and Not-for-Profit Accounting | ________________
The revaluation simply serves to determine the trader’s profit and loss up to that point. Based on that revaluation rate, the trader lost money on the day.
The rate chosen for the revaluation is significant in that differing rates will generate different profit and loss results.
For example, a closing rate of 2.0200 would show the trader breaking even. However, it must be remembered that the rate at which a position is revalued at the end of one day is also the rate at which the trader’s position is valued at the start of the next day’s trading.
P&L Impact on Spot Dealer due to Rolling of Spot
Position
Swap side
DEM, bought/(sold)
Value date
Rate
USD, bought/(sold)
Day 3
Day 4
A revaluation at 2.0100 is less favorable than a rate of 2.0200 for the trader from the standpoint of today’s profit and loss (P&L).
However, it is equally more favorable when the next day’s results are determined. To prevent games from being played, revaluation of daily P&Ls should be done using a consistent source of rates. While traders can have input into the revaluation rate, they should not be able to unilaterally set the rate.
One risk of allowing traders to set their own revaluation rates is that they could artificially hide losses for an extended period of time.
In addition, if a trader in a major loss position tries to get out of it without anybody knowing, the losses usually seem to increase, instead of decrease.
An objective and consistent revaluation system is thus warranted.
Industry practice is usually to obtain the revaluation rates at the same time of day every day from the same sources, whether they be the closing rates from selected Reuters pages, selected broker(s), other banks, or the central bank.
A further dimension of the spot trader’s P&L concerns the overnight position. In the above case, the trader went home on day 1 long 500,000
Libor market rate
Libor credit spread
to/from [Swap]
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