Mark-to-market: Difference between revisions

Marking-to-market is a method of accounting to value an asset. In the absence of a better idea, it is to treat the value of something you have ''not'' sold as if you ''had'' sold it. Regular readers will not be surprised to hear that this can lead to confusion, disappointment and colossal regret. They may, however, be surprised to hear there have been many financial professionals — ones who, similarly, should not have be surprised to hear that — who, in fact, ''have'' been surprised to hear it, and have had the frights of their lives finding it out the hard way over the 30 years since mark-to-market accounting became ''de rigueur'' — repopularising itself in the hands of accounting wizards like [[Jeff Skilling]] and [[Andrew Fastow]], having been banned at the urging of the [[SEC]] as long ago as 1938.

If a market bid is “[[firm bid|firm]]”<ref>Meaning the person making the bid is prepared to trade at that price.</ref> and the market [[liquid]]<ref>Meaning there are lots of people in the market for that asset at that time</ref> then however estimable your fundamental valuation techniques, you can’t argue about a [[market value]]. In financial markets one can do without a firm bid for your own asset if there is an public market for assets exactly like your one where one can see trading prices every day. Like the equities market, for example.

These are big ifs. As has been demonstrated time and again —[[Enron]], the [[Global Financial Crisis]], [[Archegos]] — the market is an inconstant friend. When you don’t really need it, it is there for you, regular as clockwork. Everyone feels reassured. When you do need it, mark-to market valuations have a horrible habit of turning out to have been quite badly wrong. This has something to to with [[observation dependence]]: an expression we made up, but which owes something to [[systems theory]] and even [[quantum indeterminacy]]. The very act of interacting in the market changes the market. Observing someone else’s sale does not count as interacting. Selling your own does. For it is one thing to value your asset by reference to the prevailing price at which other people are buying and selling assets ''like'' yours — while at the same time ''not'' selling yours, remaining on risk to its forward price — and quite another to crystallise your gain and actually sell. The environment in which you are selling makes a big difference. If everyone is simply enquiring about the going rate, to mark their own [[pnl]] statement, the market will tell you one thing. If everyone is ''actually selling '' to beat the dip, it will tell you something quite different.