For Spot & Forwards
Profit & loss can be calculated in terms of “pips”, “absolute P&L” or in “percentage return” terms as follows:
Step 1: Subtract the sell rate from the buy rate. The resultant P&L is in “pips”.
Step 2: Multiply the “pips” as calculated in Step 1 by the principle amount traded which will give you the “absolute P&L”. Please note that the “absolute P&L” is not in “base currency” of the amount traded.
Step 3: Convert the “absolute P&L” into base currency by dividing with the spot rate of the currency pair and then divide it by the principle amount multiplied by hundred will give the percentage return. Alternatively, the P&L in “pips” can be divided by the spot rate and multiplied by hundred to arrive at “percentage return”
Do access our Profit & Loss Calculator for the above calculations.
Note: The P&L is payable as per the value date of “buy” and “sell” i.e. if they are traded as spot, then P&L is payable on spot value date and if they are traded for forward date then P&L is payable on the forward value date.
Example:
Buy EURUSD 1,000,000 @ 1.4915 and sell EURUSD 1,000,000 @ 1.5000
- "pips" P&L: 1.5000 – 1.4915 = 0.0085 or 85 pips
- “absolute P&L”: 0.0085 x 1,000,000 = 8,500 (in USD)
- “percentage return”: (0.0085/1.4915) x 100 = 0.57% or ((8,500/1.4915)/1,000,000) x 100 = 0.57%
Above P&L is value date SPOT
For NDF
Buy USDINR @ 46.00 value date 1 month for USD 5,000,000.
Case 1:
Position is held till maturity and it gets automatically offset by the “fixing rate”. Let’s say the fixing rate is 45.50
- “pips” P&L: 46.00 – 45.50 = 0.50 (loss)
- “absolute P&L”: 0.50 x 5,000,000 = 2,500,000 (in INR)
- “percentage return”: (0.50/46.00) x 100 = 1.09% or ((2,500,000/46.00)/5,000,000) x 100 = 1.09%
The Loss is payable value ”spot date of the fixing rate”.
Case 2:
Position is reversed before maturity by a “contra” trade i.e. sell USDINR @ 45.75 value date same as that of open position for USD 5,000,000
- “pips” P&L: 46.00 – 45.75 = 0.25 (loss)
- “absolute P&L”: 0.25 x 5,000,000 = 1,250,000 (in INR)
- “percentage return”: (0.25/46.00) x 100 = 0.55% or ((1,250,000/46.00)/5,000,000) x 100 = 0.55%
Loss is payable on the 1 month maturity date of the initial contract.
For Options
Buy EUR Call/USD Put, strike (k) 1.5000, expiry 3 months, New York cut for EUR 5,000,000 at a premium of 0.65% of notional (in EUR) or EUR 32,500
Case 1:
Before the expiry, the value of the option increases and the same option is sold say at a premium of 1.25% of notional (in EUR) or EUR 62,500
Profit is premium received minus premium paid or EUR 62,500 – EUR 32,500 = EUR 30,000
The value date of the premium is either the spot date or the maturity date of the option, as agreed between the counterparties.
Case 2:
The option is held till maturity. In such a situation, after 3 months the option becomes exercisable depending on the spot rate on that day:
- Spot rate is 1.5000 or below. Option expires worthless
- Spot rate is 1.5001 and above. Option is exercised and it will result in a cash position of long EURUSD 5,000,000 @ 1.5000 which can be sold off on spot basis to book profit. (cost of premium has to be considered in net profit/loss calculation).
