Mark to Market - Explained
What is Mark to Market?
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Table of ContentsWhat is Mark To Market?How Does Mark To Market Accounting Work? Mark to Market in InvestingAcademic Research on Mark-to-market
What is Mark To Market?
Mark to market (MTM) is an accounting method that is based on measuring the value of assets based on their current price. It is also called a fair value accounting that measures the value of assets or liabilities whose value can change over time. Hence, 'fair' value approach is adopted when measuring these accounts (assets and liabilities). Mark to market show the current market value of market price of assets and liabilities. The major goal of Mark to market is to give a reliable report on a company's financial status based on the current price of the assets and liabilities they hold.
How Does Mark To Market Accounting Work?
In the accounting industry, mark to market shows the current value of an asset, this is important in the compilation of financial statements for a fiscal year. When financial statements are compiled, they must reflect the current market value of assets. When this is contained and reflected in financial statements, financial institutions can then adjust assets account if borrowers defaulted on their loan payments in the course of the year. Companies adjust or mark these assets to the fair value given by Mark to market. However, if the measurement does not reflect the fair or true value of accounts, problems may arise. Calculating the price if an asset when there is market volatility of financial crisis can result in inaccuracy of the measurement of an asset's value. For instance, during the 2008 Financial crisis, the true or fair value of securities held as assets by banks were not reflected accurately because there was no market for this security.
Mark to Market in Investing
In investment market which entails securities trading, mark to market reflects the current market value securities, portfolios or accounts. Mark to market is vital to help investors or traders meet margin requirement in the market. For instance, if the margin of the assets drops below the requirement, the trader is likely to face a margin call. Aside from assets or securities, mutual funds are also marked to market. Mark to market is important for futures contract which involves a long trader and a short trader. Futures contracts involve two parties, the bullish (long trader) and the bearish (short trader), if a decline in value occurs, the long account will be debited while the short account credited due to the change in value. This means that the trader with a short position in the future contact tends to benefit more from a fall in the value of the contract than the trader with a long position. However, daily mark to market settlements in future contracts continue until either of the parties closed his position and goes into a long contract.