Mark-to-market: Difference between revisions
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There the temptation might be to [[mark-to-model]] — cue much jiggery pokery and [[opacity]], because you value your positions based on what your clever models — the same ones that did all that lovely [[backtesting]] — tell you. But [[Models.Behaving.Badly - Book Review|Models don’t always behave themselves, do they]]. Especially when they’ve been ginned up by self-interested credit derivative structurers or fanciful Enron employees. | There the temptation might be to [[mark-to-model]] — cue much jiggery pokery and [[opacity]], because you value your positions based on what your clever models — the same ones that did all that lovely [[backtesting]] — tell you. But [[Models.Behaving.Badly - Book Review|Models don’t always behave themselves, do they]]. Especially when they’ve been ginned up by self-interested credit derivative structurers or fanciful Enron employees. | ||
Mark-to-market has its drawbacks, especially in [[Illiquidity|illiquid]] contracts or for speculative new business lines for which there isn't yet a market. This did not stop [[Enron]] recognising | [[Mark-to-market]] has its drawbacks, especially in [[Illiquidity|illiquid]] contracts or for speculative new business lines for which there isn't yet a market. This did not stop [[Enron]] recognising $110 million of estimated profits from a 20-year deal with Blockbuster Video<ref>Remember them?</ref> for on-demand entertainment to various U.S. cities by notwithstanding dubious technical viability and no evidence of market demand<ref>''At the time''. In fairness, it ''was'' an idea before its time. But let not rose-tinted shades of 20:20 hindsight distract you from the essential fact: no-one knew that then, and it ''was'' accounting fraud.</ref>. When the network failed to work, Blockbuster withdrew from the contract. Enron continued to recognize future profits, even though the deal resulted in a loss. | ||
{{Seealso}} | {{Seealso}} | ||
*The [[Enron ron]] | *The [[Enron ron]] | ||
*{{br|Models.Behaving.Badly}} | *{{br|Models.Behaving.Badly}} — book review | ||
{{ref}} | {{ref}} | ||
Revision as of 11:35, 11 March 2019
The value of an asset by reference to its market price — ie what folks are prepared to pay for it. Popular amongst derivatives folk. Good pragmatic, non-dogmatic stuff. You will find all kinds of chat about bids and offers, reference market-makers and so on.
There the temptation might be to mark-to-model — cue much jiggery pokery and opacity, because you value your positions based on what your clever models — the same ones that did all that lovely backtesting — tell you. But Models don’t always behave themselves, do they. Especially when they’ve been ginned up by self-interested credit derivative structurers or fanciful Enron employees.
Mark-to-market has its drawbacks, especially in illiquid contracts or for speculative new business lines for which there isn't yet a market. This did not stop Enron recognising $110 million of estimated profits from a 20-year deal with Blockbuster Video[1] for on-demand entertainment to various U.S. cities by notwithstanding dubious technical viability and no evidence of market demand[2]. When the network failed to work, Blockbuster withdrew from the contract. Enron continued to recognize future profits, even though the deal resulted in a loss.
See also
- The Enron ron
- Models.Behaving.Badly — book review