What is mark to market (MTM) and how is it calculated?

Mark-to-market (MTM) is a fundamental accounting method used to evaluate the value of an asset or position based on its current market price. Primarily applied in trading and investing, MTM calculates the unrealised gains or losses on open positions, offering insights into the current profitability or potential risks associated with these positions. MTM calculations entail several steps:

  • Initial Position: The value of a position is initially recorded upon its creation, based on the purchase price or the prevailing market rate at entry.
  • Market Price Update: MTM calculations periodically update the position’s value based on changing market prices. This process occurs daily or as needed.
  • Unrealised Gain or Loss: The variance between the initial and updated market value indicates the unrealised gain or loss on the position. A higher market value than the initial one indicates an unrealised gain, whereas a lower value suggests an unrealised loss.
  • Margin Adjustments: Significant changes in market value can impact margin requirements, affecting the amount of margin needed to maintain the position.
  • Account Balance Adjustments: Unrealised gains or losses from MTM calculations often reflect changes in the trading account balance. Gains may increase the balance, while losses may decrease it.

It’s crucial to note that MTM assesses unrealised gains or losses, meaning they’re not realised until the position is closed. Upon closure, the final realised gain or loss is determined. MTM serves as a valuable tool for traders and investors to monitor the ongoing performance and potential risks of their open positions.