The p&l of trades (and cash flows) is described as:


Most trades involve delivery at some point in the future

Because the value of the commodity to be delivered is not known before the delivery, the value needs to be estimated or calculated from market data.

For forwards and futures and other linear trade types the value may be estimated by a simple mark to market calculation

For options and other non-linear trades the value may be calculated using the Black 76 method (derived from the earlier Black-Scholes method)

We say the trade's value (its p&l) is unrealized because it is not yet known for certain, and is therefore a cause of market risk

Once delivery has taken place, we know (or don't care about) the delivered value, the value of he trade is known and no longer varies. In effect the p&l is locked in, there is no more market risk associated with this trade and the p&l isĀ said to be realized

The p&l of a trade (or cash flow) moves from unrealized to realized when one or more of the following conditions has been met

  • Delivery has taken place
  • Payment has taken place
  • Some time after one of the previous conditions

Realization is the set of business rules that defines when p&l moves from unrealized to realized based on:

Realization is subjective: different organizations may have different business rules to determine realization

» Detailed Glossary