Mark-to-market (MTM) accounting values an asset or liability at its current market price rather than its original purchase cost, so a portfolio's reported value reflects what it's actually worth today, gains and losses included.
Why It Matters
MTM is what makes daily margin calls, VaR calculations, and fund NAVs meaningful — a portfolio carried at cost would hide losses until an asset is actually sold, which is exactly the kind of masked risk that regulators and investors need visibility into. It's also why volatile markets create real, not just paper, stress: MTM losses trigger real margin calls even before a position is closed.
How It Works in Practice
- 1At each valuation date (daily for liquid instruments), reprice every position to its current observable market price
- 2Record the difference from the prior valuation as an unrealized gain or loss
- 3For exchange-traded derivatives, MTM losses can trigger margin calls requiring immediate cash posting
- 4Illiquid assets without an observable market price are marked using models or comparable transactions (Level 2/3 in fair-value accounting hierarchy) rather than a direct market quote
Common Pitfalls
For illiquid or thinly traded assets, mark-to-market can become mark-to-model, introducing valuation judgment (and potential manipulation risk) that a true market price wouldn't have
MTM can force realized losses through margin calls or covenant breaches even when a firm's long-term investment thesis is intact and it never intended to sell
During market dislocations, observable prices themselves can become unreliable (wide bid-ask spreads, few actual trades), making the 'market' price a poor proxy for fair value