According to the Basel Committee framework (including FRTB) and standard risk management practices, backtesting of VaR models should be performed using both Actual Returns (Actual P&L) and Hypothetical Returns (Hypothetical P&L).

• Hypothetical returns are generated by evaluating the end-of-day positions of the previous day using the current day's prices (i.e., freezing the portfolio). This is important because the VaR calculation typically assumes a static portfolio over the time horizon, so comparing VaR against hypothetical returns provides a pure test of the pricing and risk models without the noise of intraday trading.
• Actual returns represent the total actual P&L realized by the trading desk, which naturally includes intraday trading dynamics.

Using both allows risk managers to independently assess the accuracy of the underlying VaR model (via hypothetical returns) and observe how intraday trading activity affects the bank's overall risk profile (via actual returns). Option B correctly defines and pairs these two essential return measures.