Clean P&L

Clean P&L for backtesting purposes is calculated by removing unwanted components
from the dirty P&L and adding any missing elements. This is done to the greatest possible
extent given the information available. Ideally, the clean P&L should not include:
Ω Fees and commissions
Ω Profits or losses from bid–mid–offer spreads
Ω Provisions
Ω Income from intraday trading

The clean P&L should include:
Ω Interday P&L
Ω Daily funding costs
Synthetic or hypothetical P&L
Instead of cleaning the existing P&L figures, P&L can be calculated separately for
backtesting purposes. Synthetic P&L is the P&L that would occur if the portfolio was
held constant during a trading day. It is calculated by taking the positions from the
close of one trading day (exactly the positions for which risk was calculated), and
revaluing these using prices and rates at the close of the following trading day.
Funding positions should be included. This gives a synthetic P&L figure that is
directly comparable to the risk measurement. This could be written:
Synthetic P&LóP0(t1)ñP0(t0)
where
P0(t0) is the value of the portfolio held at time 0 valued with the market prices as of
time 0
P0(t1) is the value of the portfolio held at time 0 valued with the market prices as of
time 1
The main problem with calculating synthetic P&L is valuing the portfolio with
prices from the following day. Some instruments in the portfolio may have been sold,
so to calculate synthetic P&L, market prices must be obtained not just for the
instruments in the portfolio but for any that were in the portfolio at the end of the
previous trading day. This can mean extra work for traders and business unit control
or accounting staff. The definition of synthetic P&L is the same as that of interday
P&L given in the Appendix.