Mark-to-market

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ISDA Anatomy

incorporating our exclusive ISDA in a Nutshell™


Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | JC’s ISDA code project
Navigation Preamble | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
Events of Default: 5(a)(i) Failure to Pay or Deliver5(a)(ii) Breach of Agreement5(a)(iii) Credit Support Default5(a)(iv) Misrepresentation5(a)(v) Default Under Specified Transaction5(a)(vi) Cross Default5(a)(vii) Bankruptcy5(a)(viii) Merger without Assumption
Termination Events: 5(b)(i) Illegality5(b)(ii) Force Majeure Event5(b)(iii) Tax Event5(b)(iv) Tax Event Upon Merger5(b)(v) Credit Event Upon Merger5(b)(vi) Additional Termination Event

Index — Click ᐅ to expand:

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The market value is the value of an asset by reference to its market price — ie what folks are prepared to pay for it at the particular point in time, rather than by assessing the value of the fundamental components of the asset. The latter involves ineffable wisdom, technical analysis and cojones of steel — and at times of stress is apt to make an owner feel aggreived at the world; the former is a bit like sticking something on eBay — hence, “marking to market” — and yields an instant answer if not necessarily gratification.

As long as the bid is “firm[1] and the market liquid[2] then however estimable your fundamental valuation techniques, you can’t argue about a market value.

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[3] for on-demand entertainment to various U.S. cities by notwithstanding dubious technical viability and no evidence of market demand[4]. 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

References

  1. Meaning the person making the bid is prepared to trade at that price.
  2. Meaning there are lots of people in the market for that asset at that time
  3. Remember them?
  4. 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.