Wednesday, September 24, 2008

Is 'Mark-to-Market' Similar To 'Check Kiting?'

In accounting and finance, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for that instrument or similar instruments. For example, the final value of a futures contract that expires in 9 months will not be known until it expires. If it is marked to market, for accounting purposes it is assigned the value that it would fetch in the open market currently.

Example: If an investor owns 100 shares of a stock purchased for $40 per share, and that stock now trades at $60, the "mark-to-market" value of the shares is equal to (100 shares × $60), or $6,000, whereas the book value might only equal $4,000. [Source: Wikipedia]

This accounting method is also being held responsible for some of the financial crisis. Doesn't Mark-to-Market sound just like having 40 dollars in your checking account, but you will have twenty more dollars in there in two weeks but you go ahead and write a check for $60 to cover a bill right now? I think the American public understands what is going on. That extra $20 dollars did not come in and the check bounced.

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