Mark to Market

A way of valuing the unrealized P&L of a simple linear Forward, Futures contract or Swap

Detail

Most businesses that own assets or hold inventory routinely value those assets and inventory, the change in value between two points in time is the profit or loss

Some assets, like computers, simply depreciate, and a simple depreciation percentage is used each year

Other assets, like buildings, vary in value with the market conditions, and are generally valued using a mark to market principle (that is we simply look and see what the building is worth at the end of the accounting period)

It's important to realize that each trade is an asset (or a liability) - it's a firm contract and must be valued like any other asset

The current value of a single trade is the difference between the price paid, and the value of the delivered commodity when it is delivered (which may be a cargo, a day of gas delivery, or a half hour of power delivery)

We can find the value of the commodity once it has delivered by looking up the spot trading price on the day of delivery

But to value the deal before delivery we must mark the value of the delivered commodity to the market; that is we set the value of the commodity to the price that is currently being paid for the delivery period

For example:

We have bought 10,000 therms of gas for delivery in March next year at 25p per therm

Each day we can look at the average traded price for that month, and mark the value of the 10,000 therms to that price

After two days we note that March is trading at 27p a therm, so we mark the physical value to the market price of 27p, and subtract the price we will pay, 25p. The unrealized P&L is therefore £200 ((27p - 25p) * 10,000). Each day we will need to repeat this calculation until the delivery is complete

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