Notes On Market Accounting ( Mtm )

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1. Mark to market accounting (MTM) requires certain assets to be listed on the balance sheet at “market” values and not book values. Explain the following. (10 points) a. Explain the economic reasoning for requiring firms to MTM assets on their balance sheet. It provides an accurate picture of current and potential value of positions. Market-to-market allows for real-time monitoring of liquidity, performance, and risk exposure. It also provides consistency, objectivity, transparency. The transparency of information is helpful in providing investors with more real-time values. b. Explain what the differences are between Level 1, 2 and 3 pricing sources. Level 1 pricing sources consists of highly regulated, regularly trades,…show more content…
Thus, level 3 pricing source is the most risky. Level 3 assets are trades the least frequently. Examples of Level 3 assets and liabilities include foreign stock exchange. c. Explain what the potential downsides are for firms using MTM. Using Market-to-Market has its advantages, however, there are some prominent disadvantages as well. It causes extreme reactions to market and political events. Using MTM to value assets allow prices to adjust to what can be sold immediately. This causes a problem for real estate investor because of the immediate decrease in value. 2. Explain some of the ways the railroads have been changing the crude oil market in the United States over the last few years. (5 points) Delivery of crude oil via railroad increased 2,309% from 2011 to 2014. Railroads provide greater flexibility than pipelines. It provides greater flexibility due to once pipes are laid out, it is very difficult and expensive to be changed to a different route. It is a more economical mode of transportation than trucks. In 2014, rail deliveries accounted for 2.5% of oil delivered to refineries in the U.S. That number is up from 1% in 2013. A train can hold up to 100 rails and each rail can hold about 30,000 gallons of product. 3. The scheduling process is a very important part of the operations of a commodity trading organization. Explain how scheduling adds value to the trading operations. (You could
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