Mark to Market (MTM)
Candlefocus EditorMark to market accounting offers a more transparent view of a company's financials as it directly reflects a company's market performance as opposed to historical cost accounting which does not account for any market changes or performance. Although MTM accounting provides a more accurate figure of a company's asset value, it is not always a reliable source during volatile times, where market conditions do not accurately reflect an asset's true value.
MTM accounting is heavily utilized in the futures market, where accounts of a futures contract are marked to market on a daily basis and any gain or loss is calculated between the long and short positions. An example is if a company bought one yen futures contract written at 0.06 dollars per yen; this position could possibly gain or lose its value due to the fluctuations in the yen market. If the yen spot remains steady at 0.07 per dollar, then the position will make a profit of 1000 -600 = 400 dollars. If at the time of settlement, the yen drops to 0.05 then the position will lose 1000 - 500 = 500 dollars.
Overall, the mark to market accounting system provides a more realistic picture of a company's financials and helps to better understand the company's assets, positions, and market performance. Due to its prominent use in the futures market, along with other advantages such as its accuracy and transparency, MTM accounting is becoming widely utilized among many industries across the globe.