Mark-to-Market P&L Calculation

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You know your positions - what you own, what you owe, when it delivers, and how hedged you are. Now comes the question that drives every trading decision: What are these positions worth, and am I making or losing money?

Mark-to-market P&L answers this. It values your positions at current market prices, showing whether you're sitting on paper gains or losses before any trades have settled. This isn't just scorekeeping - it's the foundation for daily risk management, margin calls, performance measurement, regulatory reporting (EMIR requires daily MTM valuations), and every conversation with senior management about whether the desk is making money.

This guide teaches MTM P&L from first principles - the mechanics behind every ETRM system's P&L engine. You'll learn the formula: Unrealized P&L = (Market Price - Trade Price) × Signed Quantity. Three inputs, one calculation - but understanding why it works, and recognizing when it breaks, separates traders who trust the black box from those who can verify and debug it.

You'll start with the critical distinction between realized and unrealized P&L. Realized P&L is locked in - trades have settled, cash has moved, the profit or loss is historical fact appearing on financial statements. Unrealized P&L is paper profit - what your position would be worth if you closed it today at current market prices. Unrealized changes moment-to-moment as markets move. It's what risk managers watch daily, what triggers margin calls, and what determines whether you're within loss limits.

The guide explains why sign matters through worked examples. Long positions (positive quantities) profit when market prices rise above your trade price - you bought low, market went high, close now and lock in profit. Short positions (negative quantities) profit when market prices fall below your trade price - you sold high, now you can buy back cheaper. The signed quantity arithmetic handles direction automatically. Flip the sign in your head and you'll misread whether a £50k P&L movement is profit or disaster.

You'll work through the same 6-trade reference portfolio from the Position guide, now adding current market prices.

You'll understand why small net P&L often signals good risk management, not poor trading. If you're +£1,180 on physical and -£315 on hedges, that's not £865 of pure profit - it's £1,180 of physical gains mostly offset by £315 of hedge losses. This is hedge-effective portfolio management. The physical book captured upside, the hedges limited it - exactly what hedges do. A desk showing +£50k on 10,000 MWh positions is likely better managed than one showing +£500k on the same positions - the latter took enormous unhedged directional bets.

The guide covers real-time P&L monitoring - why traders need intraday updates, not just end-of-day snapshots. When markets are volatile, a position that was profitable at 9 AM can be underwater by noon. Waiting for the overnight batch run means flying blind during system stress.

The Advanced Topics section previews what comes next: forward curves (matching trades to specific delivery periods), cross-commodity exposure (gas + power + carbon as a portfolio), VaR (statistical risk measurement), scenario analysis ("what if gas spikes 20%?"), P&L attribution (separating price moves from new trades), counterparty credit risk, options and dynamic delta, and multi-currency FX risk. These are previews, not worked examples - pointers to what professional traders encounter as portfolios grow complex.

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How This Fits the Curriculum

This guide builds directly on Position Aggregation. You must know your positions before you can value them. Together, these two guides form the foundation: what you have, and what it's worth.

Spark spreads use P&L mechanics to value generation decisions. Storage arbitrage uses P&L to calculate buy-low-store-high profitability. Every topic forward assumes you can calculate and interpret MTM P&L correctly.

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Prerequisites

Complete the Position Aggregation guide first. This guide assumes you understand signed quantities, position aggregation by commodity + delivery + book, and physical vs financial separation. You'll use the same 6-trade reference portfolio, now adding market prices and P&L calculations.

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Mastery Tip

Track real UK gas prices (National Grid Gas NBP index) and UK power prices (Elexon BMRS day-ahead) for one week. Pick two simple imaginary trades: one long, one short. Calculate unrealized P&L each day using real market prices. Track how P&L moves when prices rise versus fall. Watch how long positions behave opposite to short positions.

The formula is simple - but the intuition ("why did my P&L go up when prices fell?") only clicks when you see real market moves affect real positions you're tracking. When you stop needing the formula and just know which direction P&L will move, you've internalized MTM mechanics.

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