Mark-to-Market
19 hours agoMark-to-market accounting, also known as “marked-to-market” accounting, is the process of determining the market value of assets and liabilities through daily revaluation instead of relying on the “book value.” This accounting approach is utilized to evaluate the actual worth of assets and liabilities, as it reflects their current market price and provides a more accurate representation of a company’s financial status.
Initially introduced to evaluate the value of futures contracts, mark-to-market accounting has gained significant use in over-the-counter derivatives (OTC) markets, including spot trade and forward contract markets. It is regarded as a precise method based on market conditions at any specific moment; however, it has faced criticism because, during volatile periods, it may yield results that do not truly reflect the value of an asset or liability. For instance, if investor confidence in a particular market wanes, an asset’s value could plummet sharply due to prevailing market conditions. Furthermore, it has been linked to financial fraud and scandals.
An investor buys 100 shares in a company for $10 per share. The book value of their investment is $1,000. On the trading day after the purchase, the company’s stock price drops by 10%. Consequently, the mark-to-market value is $900, while the book value remains at $1,000.
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