what is mark to market mtm 
mark to market mtm is a method of measuring the fair value of accounts that can fluctuate over time such as assets and liabilities mark to market aims to provide a realistic appraisal of an institution s or company s current financial situation based on current market conditions in trading and investing certain securities such as futures and mutual funds are also marked to market to show the current market value of these investments investopedia laura porterunderstanding mark to market mtm mark to market is an accounting practice that involves adjusting the value of an asset to reflect its value as determined by current market conditions the market value is determined based on what a company would get for the asset if it was sold at that point in time at the end of the fiscal year a company s balance sheet must reflect the current market value of certain accounts other accounts will maintain their historical cost which is the original purchase price of an asset companies in the financial services industry may need to make adjustments to their asset accounts in the event that some borrowers default on their loans during the year when these loans have been identified as bad debt the lending company will need to mark down its assets to fair value through the use of a contra asset account such as the allowance for bad debts a company that offers discounts to its customers in order to collect quickly on its accounts receivables ar will have to mark its ar to a lower value through the use of a contra asset account in this situation the company would record a debit to accounts receivable and a credit to sales revenue for the full sales price then using an estimate of the percentage of customers expected to take the discount the company would record a debit to sales discount a contra revenue account and a credit to allowance for sales discount a contra asset account in personal accounting the market value is the same as the replacement cost of an asset for example homeowner s insurance will list a replacement cost for the value of your home if there were ever a need to rebuild your home from scratch this usually differs from the price you originally paid for your home which is its historical cost to you in securities trading mark to market involves recording the price or value of a security portfolio or account to reflect the current market value rather than book value this is done most often in futures accounts to ensure that margin requirements are being met if the current market value causes the margin account to fall below its required level the trader will be faced with a margin call mutual funds are also marked to market on a daily basis at the market close so that investors have a better idea of the fund s net asset value nav examples of mark to marketan exchange marks traders accounts to their market values daily by settling the gains and losses that result due to changes in the value of the security there are two counterparties on either side of a futures contract a long trader and a short trader the trader who holds the long position in the futures contract is usually bullish while the trader shorting the contract is considered bearish if at the end of the day the futures contract entered into goes down in value the long margin account will be decreased and the short margin account increased to reflect the change in the value of the derivative an increase in value results in an increase in the margin account holding the long position and a decrease in the short futures account for example to hedge against falling commodity prices a wheat farmer takes a short position in 10 wheat futures contracts on november 21st since each contract represents 5 000 bushels the farmer is hedging against a price decline on 50 000 bushels of wheat if the price of one contract is 4 50 on nov 21st the wheat farmer s account will be recorded as 4 50 x 50 000 bushels 225 000 the farmer has a short position in wheat futures so a fall in the value of the contract will result in an increase in their account likewise an increase in value will result in a decrease in account value for example on day 2 wheat futures increased by 4 55 4 50 0 05 resulting in a loss for the day of 0 05 x 50 000 bushels 2 500 this amount is subtracted from the farmer s account balance and added to the account of the trader on the other end of the transaction holding a long position on wheat futures the daily mark to market settlements will continue until the expiration date of the futures contract or until the farmer closes out the position by going long on a contract with the same maturity note that the account balance is marked daily using the gain loss column the cumulative gain loss column shows the net change in the account since day 1 special considerationsproblems can arise when the market based measurement does not accurately reflect the underlying asset s true value this can occur when a company is forced to calculate the selling price of its assets or liabilities during unfavorable or volatile times such as during a financial crisis for example if the asset has low liquidity or investors are fearful the current selling price of a bank s assets could be much lower than the actual value this issue was seen during the financial crisis of 2008 09 when the mortgage backed securities mbs held as assets on banks balance sheets could not be valued efficiently as the markets for these securities had disappeared in april of 2009 however the financial accounting standards board fasb voted on and approved new guidelines that would allow for the valuation to be based on a price that would be received in an orderly market rather than a forced liquidation starting in the first quarter of 2009 1