Mark-to-market (MTM) is an accounting valuation method that requires certain assets and liabilities to be valued at their current market prices, rather than their historical cost or book value. This method aims to reflect the true economic value of assets and liabilities, making financial statements more transparent and relevant.
Characteristics of MTM
Reflects market changes in real-time: MTM requires periodic (usually daily or monthly) adjustments to the value of assets and liabilities based on market prices, allowing financial statements to reflect market fluctuations in a timely manner.
Applicable to various financial instruments: MTM is widely used for various financial instruments, including stocks, bonds, derivatives, and loans.
Enhances transparency: MTM improves the transparency of financial statements by providing more accurate valuations of assets and liabilities, enabling investors and regulators to better understand a company's financial position.
Application of MTM in Futures Markets
As futures prices often fluctuate significantly within a single day, using instantaneous profit and loss results to trigger forced liquidation could unilaterally lead to numerous trading disputes, or even prevent normal trading altogether. Therefore, exchanges typically conduct financial settlements either at a specific time before the market closes or before the next trading day opens. If a party with insufficient margin fails to replenish their margin within the specified time, the exchange will exercise its right to force liquidation.
Calculating Floating Profit and Loss: The clearing house calculates the floating profit and loss of investors' open positions based on the closing price of the day's trading, and determines the required margin for open positions. If an account experiences a floating loss and the margin is insufficient to maintain open positions, the clearing house will notify the member to make up the difference, i.e., add margin, before the market opens the next day, otherwise, forced liquidation will occur. If an account has a floating profit, it cannot withdraw that profit unless the open positions are closed, converting the floating profit into an actual profit.
Calculating Actual Profit and Loss: Profit and loss realized through closing positions is called actual profit and loss.
Advantages of MTM
Enhances the relevance of financial statements: By reflecting the current market value of assets and liabilities, MTM makes financial statements more relevant, providing investors and creditors with more useful information.
Increases transparency: MTM improves the transparency of financial statements, enabling users to better understand a company's financial position and risk exposure.
Facilitates risk management: MTM can help companies better identify and manage market risks, as market price fluctuations directly impact the value of assets and liabilities.
MTM is an important accounting valuation method that improves the relevance and transparency of financial statements by reflecting market changes in real-time. However, MTM can also increase the volatility of financial statements and pose valuation challenges. When applying MTM, companies and investors need to fully understand its advantages and disadvantages and take appropriate risk management measures.
