Have you ever wondered how a swaps trader actually makes or loses money? Have you ever stopped to consider how different running an OTC swaps book is to managing a futures book? Here is a real-world breakdown.

The Basics

Swap PnL has three components:

• Realised cashflows – what physically settles today.
• Future cashflows – the value of all future fixed and floating payments. These change because:
  • Market projections of expected interest rates change. This impacts the discounted value of my future cashflows.
  • Time passes. Every cashflow is one day closer, increasing the present value.
• Change in cashflows – including;
  • New trades. Any trades I do today impact the cashflows I expect to pay or receive in my portfolio. They will have a non-zero mark-to-market value.
  • Amendments (including terminations and novations). Any changes I make to existing trades, including modifying amounts, rates, fees or cashflow dates.

Most of this is handled automatically by trade-capture and valuation systems. The difficult part is monitoring how the value of future cashflows changes day-to-day. This is risk management in the real world.

It all starts with DV01

DV01 – remember that? Here it is again, this time appearing as the core input to daily PnL. It tells you how sensitive your future cashflows are to moves in each point on the curve:

How are DV01s calculated for a whole portfolio? It is an iterative process relative to the input instruments:

1. Value the portfolio.
2. Bump one input rate – e.g. 2Y SOFR OIS – by 1 basis point (0.01%).
3. Record the change in PV.
4. That change in valuation is the DV01 in my 2Y bucket.
5. Repeat for every other instrument on the curve.

Once you have those DV01s, daily PnL becomes a simple multiplication of risk x market move.

Future Cashflows and PnL

Here is an example DV01 ladder and daily PnL for a hypothetical USD SOFR swaps portfolio:

Showing;

• DV01s exist wherever you have cashflows – even in futures buckets without any futures positions.
• PnL for each bucket is simply DV01 x Δbp.
• In practice, I summarise this into 6 easier to manage portions of the curve.
  • “Stub” is that pesky area short of the first futures contract where PnL often goes to die/decay away – see “Time” in the next section.
  • Futures are the SOFR STIR contracts traded at CME. Their PnL estimation is still the same – DV01 x basis point move.
  • Swaps I broke into four areas. My old swaps book was heavily influenced by issuance patterns, and I found these the four areas of the curve where risk tended to concentrate.

You will often hear traders say that their “book trades long” or “we have a flattening bias”. This doesn’t mean that they have just gone out and bought 10Y notes or have put on a 2s10s flattener in the broker market. It is far more likely to reflect the balance of risks they have across these buckets of risk.

Time

One of the weirdest aspects of running a swaps book is that even if I do nothing and the market does nothing, I have PnL on my book. And yet this isn’t an options book. Why?

Let’s do the maths.

In the previous example, I have a large “Stub” position, equivalent to roughly $6Bn of net cashflows inside a month (which will be offset by later cashflows).

What is the time-sensitivity like to such a cash-flow? Let’s run the numbers:

I then shift the dates by one business day (so my first date becomes 26/11/2025). We see:

• The discount factor for 8th Dec moving from 0.99866296 to 0.99877049 and…
• …the discount factor for 8th Jan moving from 0.99544987 to 0.99555705.

The offsetting effect gives a true “theta” or time decay of about $2k/day (and $6k per weekend).

Funding

The SOFR curve has a crazy shape at the moment. The month-end funding stress + expected Fed cut gives us a funky looking forward curve:

Sharp-eyed readers will have noticed that I am running a funding position “over the turn” in the above example – effectively borrowing $6Bn for a month, which incorporates the spike in forwards over the end of year reporting period.

Our previous risk ladder isn’t granular enough to pick this up. Therefore my input rates might not change much, but the single day’s turn rate might change (by 25 basis points or more). This will have an outsized impact on my 8th Jan cash-flow. A 10bp reduction in stress improves the valuation of this position by about $16,000.

Think about that in terms of the January issuance season and the risk that dealers take in “pre-positioning” in the quiet December season.

PnL Explain

At the end of the day, a trader must reconcile their PnL. They will:

• Verify Risk. Does the system-reported DV01 match their expected tally of existing risk plus new risk traded that day?
• Estimate PnL. Start of day DV01s multiplied by market moves during the day.
• Compare to system PnL. This has multiple components, as shown below:

The breakdown includes:

• Market Risk – explained above.
• Time – the discounting effect.
• New Deals – day-one PV of trades done today.
• Amendments usually zero.
• Month to date PnL – to check whether any historic cashflows have unexpectedly changed due to amendments/terminations.
• Unexplained – the difference between the reported PnL in my system and what I have calculated above.

On some days, we may also have “gamma” on the book, occurring from:

• Really big market moves. A large change in rates (25bp in the long-end) changes the discount risk of the book. The DV01s are a function of the outright levels of rates.
• Futures roll. Once I remove the December contract (typically around the 10th December) my DV01s are being calculated against different instruments. This applies at the short-end because I will see exposure to the 3 month OIS rate again. And also at the 2Y point, where risk rolls in to the “new” Dec-28 STIR on my curve.

It is wise to value the portfolio on the new and old curves with no change in market rates to estimate gamma PnL.

In Summary

• Question: What is the PnL of a swaps book?
  Answer: A combination of realised cashflows, the changing value of future cashflows, and the impact of new trades, amendments, terminations and novations.
• Q: How is daily market PnL estimated?
  A: By multiplying each curve bucket’s DV01 by the basis-point move in its corresponding input rate.
• Q: Why is there PnL even when nothing happens?
  A: Because time changes discount factors – every cashflow is one day closer – creating meaningful daily “theta” even in a linear swaps book.
• Q: What drives unexpected or outsized PnL swings?
  A: Funding distortions (year-end turns), curve roll effects, and large rate moves that change DV01s – producing “gamma-like” behaviour even without options.