Mark To Market (MTM)

Mark to Market (MTM) is an accounting method that values financial assets or liabilities at their current market value. It is commonly used in financial markets to assess the value of traded assets and aims to accurately reflect a company’s financial position and performance.

The working principle of MTM can be summarized as follows:

1. Daily Valuation: MTM requires financial assets or liabilities to be valued based on their current market value each day. This means that the value of assets is determined based on the actual market prices. For example, the value of a stock is determined based on the market price on that day.

2. Profit/Loss Calculation: The differences resulting from daily valuations are recorded as profit or loss. If the value of an asset has increased, a profit is recorded, while a loss is recorded for a decrease in value.

3. Reflection in Financial Statements: MTM ensures that current values are used in financial statements. This helps companies to reflect their true values and financial positions. For example, the balance sheet of a company would show the current values of financial assets that have been subject to MTM valuation.

Advantages of MTM include:

1. Reflects True Values: MTM allows financial assets or liabilities to be valued based on their actual market values. This helps companies to more accurately reflect their financial positions and performance.

2. Risk Management: MTM enables companies to quickly respond to fluctuations in financial markets. Changes in asset prices are quickly recorded as profit or loss, allowing companies to better manage their risks.

3. Transparency: MTM ensures the use of current values in financial statements. This helps companies to present their financial positions in a more transparent manner.

However, there are also some disadvantages to MTM:

1. Volatility: MTM is sensitive to fluctuations in market prices. This means that sudden changes in asset values can be recorded as profit or loss, leading to volatility in a company’s financial statements.

2. Manipulation Risk: MTM requires valuations to be based on actual market prices. However, sometimes market prices may be uncertain or susceptible to manipulation, which can result in inaccurate valuations.

MTM is widely used, especially in valuing traded assets in financial markets. However, it may not be necessary for every company to use MTM, and different valuation methods may be preferred in certain situations. Companies should consider their financial positions and requirements to decide which valuation method to use.