Mark-to-market

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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 posittions 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 estimated profits of more than $110 million from a 20-year deal with Blockbuster Video for on-demand entertainment to various U.S. cities by notwithstanding dubious technical viability and no evidence of market demand. 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