What is Mark to Market?
Market to Market is one of the most critical aspects of financial markets these days. By definition, MTM is an accrual accounting measure that is equal to the sum of the MtM values of all contracts with a given counterparty. MtM is equal to the present value of all expected inflows less the present value of expected payments (positive if in favor of the party and negative if not). MtM is a measure of replacement cost. However, although generally close, the current replacement cost is not theoretically the same as the MtM value due to factors such as transaction costs and bid-ask spreads.
Example of Mark to Market:
Let take a simple example of mark to market for an equity portfolio. If we have a portfolio consisting of ABC stocks with 100 share and price of the stock is USD 100, then the MTM position would be USD 10,000. If the price of the stock goes up to USD 110, the new MTM position would be USD 11,000.