Mark to Market Process

Because the trade position is always changing all the time, it is important that the bank's senior management has clear procedures regarding the mark-to-market traders to monitor performance.

Mark-to-market is a daily process in which a department (which is independent from the traders), obtain and verify the market price for all instruments in the trading book. For markets where trading is done directly with the opposition, closing price obtained from brokers active in the market, independent of the bank and find out current market price.

Some prices can be obtained from the official fixing rates such as LIBOR is determined daily (by the British Bankers' Association in London). This rate is used as a reference for many derivatives contracts as well as historical analysis.

In addition to brokers and official fixing, closing rates for some instruments obtained from official exchanges. Example:
- The closing price of shares determined by the stock exchanges where the shares traded.
- Futures contracts and options for future trading at future exchanges around the world. Each stock's closing price of each set should be used to re-evaluate all positions. Futures contracts are traded for interest rates, foreign exchange, bonds, komodiri, energy and stock index.

Procedure mark-to-market procedure consists of finding and verifying the price and put it into the bank revaluation system. The system will calculate the value of each instrument to be recorded on the bank's balance sheet. Current replacement value is also called value because they reflect the value that will pay the bank if the bank intended to make transactions at current market prices. Often the system also calculates the current risk positions resulting from the instruments which were revalued, or can be produced by a system of its own risks.

Current value of a transaction is used for:
- The calculation of profit - and loss - by comparing current values against original values
- The calculation of counterparty credit risk - by analyzing the current values of all transactions with the same counterparty (see chapter 2)
- Calculation of collateral for OTC transactions - count the current value of the instrument which is used as collateral to ensure that collateral mencover exposures from counterparty
- Margin calls by future exchanges are based on current market value. 'Margin' is the same as collateral payments on OTC transactions
- Cash settlement instruments - the end of the market value is used to complete the transaction with the counterparty