Mark to the market

mark to the market

The adjustment of an account to reflect gains and losses at the end of a trading period. This adjustment is especially relevant in accounts that trade commodity futures because it is used daily to determine whether the appropriate margin is being maintained. Compare tax straddle.

Case Study Unrealized gains from derivatives that had been marked to the market made up approximately half of 2000 reported earnings for both Enron and Dynegy, two large energy-trading companies. Corporations are required to mark to the market derivative contracts that are owned or owed. Changes in market values of these contracts must be included in reported earnings even though the contracts have not reached the settlement or expiration date and no money has changed hands since the original transaction. For example, a baking company that hedges price fluctuations by purchasing contracts for future delivery of wheat must include in reported income any changes in the value of the contracts that are held during the reporting period, even if the gains and losses are unrealized. The Financial Accounting Standards Board grants companies considerable flexibility in determining how derivatives are valued and, as a result, how earnings are impacted. This discretion allows companies to occasionally abuse the mark-to-the-market rule, especially when contracts are seldom traded and difficult to value. Energy companies are typically heavy users of derivatives.

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Mark to the market. When an investment is marked to the market, its value is adjusted to reflect the current market price.

With mutual funds, for example, marking to the market means that a fund's net asset value (NAV) is recalculated each day based on the closing prices of the fund's underlying investments.

With a margin account to buy futures contracts, the value of the contracts in the account is recalculated at least once a day to determine whether it meets the firm's margin requirements.

If that value falls below the minimum specified, you get a margin call and must add assets to your account to return it to the required level.