Explain marking to market with an example

Question

Explain marking to market with an example.

Answer 1

A stock is trading at $47, but you think this is seriously undervalued. You believe that the value must be $60. You buy that stock. How much do you say to people your little ‘portfolio’ is worth as $47 or $60? When you say $47 then you marking to market, when you say $60 you are marking to model or your model. Of course this is open to serious abuse and therefore it is usual, and frequently a regulatory need, to quote the mark-to-market value. When you are right about the stock value so then the profit will be realized like the stock price rises.