.... What is the need to add the discounting portion to it?
This has several points of view, but to me at its core its the simple yet fundamental principle that you need to take into account the time value of money for the future cashflow that will result from the settlement.
Others come from the Finance and Middle Office realm where you have risk policies or regulatory requirements for how to compute your realized PnL, Liquidity GAP, VaR, PFE/CVA, RWA, so on and so forth, but they can all be traced back to the same basic principle TVM.
The fact that we have a settlement delay is just to give time to Back Offices around the market infrastructure
to do their job without putting to much strain on operations trying to avoid fat fingers or operational errors, nowadays seems like a crazy old dated thing, but its just the way the system self organized... that is until the blockchain crowd (not crypto) gets their way with near instant settles, but even then I believe we would start to use the same some form of continuously
compounded interest rates for intraday calculations.
Finally think about a case were you bought the bond for 99, and now 2 weeks have passed after you bought it... you have 99 in your nostro/bank/transit account and have a bond with MV of say 100.... if you were to sell the bond again today (2 weeks after you bought it) you would settle in T+2... it would seem incorrect to simply say 100{@T+2} - 99{@T+0} = 1 is your pnl right away (it will be correct two days from now, not today).
Jericho:
....If we introduce the settlement date approach then is there a corresponding formula you would use in order to calculate the PL for T+2 and discount back to today using a USD Libor Curve?
Again, in line with TVM, I would say the formula is just the present value, future value discount factor relationship.
PV=FV*DF
Now, the choice of discount rate/curve is up to how the bank/desk and how they would think about the liquidity/funding in each currency, the creditworthiness of counterpart, FTPs and all the other fancy adjustments you want to put on it.
Rgds,
M