mark to market

dnsk · Post by **dnsk** » Fri May 09, 2014 6:21 pm

can someone please explain mark-to-market valuation or how it should work in theory for a corporate bond? thanks

Martinghoul · Post by **Martinghoul** » Fri May 09, 2014 7:40 pm

Is this a serious question?

dnsk · Post by **dnsk** » Fri May 09, 2014 11:03 pm

It's indeed sounds very simple though I have looked for and could not find the answer.

For example for the initial date if B is risk free bond price and R, R less than B what will be the initial payment to MtM account?

Thanks

FDAXHunter · Post by **FDAXHunter** » Sat May 10, 2014 11:38 am

What's a Mark-to-Market account? And since when do we receive payments on open positions in corporate bonds? And why is there a risk-free price for a corporate bond and what does it have to do with marking to market?

Cheng · Post by **Cheng** » Sat May 10, 2014 12:47 pm

Sounds like homework...

dnsk · Post by **dnsk** » Sat May 10, 2014 3:00 pm

it is not a homework. it seems to be that collateral issue is a new trend in pricing. it came after crises began and replaced credit derivatives on the front of the finance development.

I am not sure that it seems IMHO that MtM is the basis of collateralization. Initially MtM was an accounting issue used for determination of the 'fair' price of a contract. MtM in accounting used to reflect a day price changes of the contract. From the time crises began it have been applied for the market. It looks a difference between finance and accounting MtM. In accounting it represents calculations while in finance one or both counterparties should make a payment to MtM account. People who studies the collateralization primarily are studying a complex types of derivatives like swaps or options where two counterparties are subject to default.

The ISDA master agreement considers collateralization as a mitigation of the counterparty credit risk tool. When counterparty is out-of-the-money it should post collateral. If the counterparty submit cash it looks for me that it is MtM adjustment while of other high rated assets are admissible then it looks like collateral. It is subjective point of view.

Here how my question came up. The seller of a corporate bond is subject to credit risk and buyer not. If B and R are risk free and risky bond prices initiation. I thought that R will be first payment to MtM account. For example if default comes immediately seller of the bond should return this sum to buyer of the bond or if bond default on the next day seller should return initial amount plus risk free interest to bond's buyer. The problems come later with payments prior to default.

I thought that someone can recommend to read something or makes a suggestion.

NeroTulip · Post by **NeroTulip** » Sat May 10, 2014 3:52 pm

Got to borrow this from pj.

FDAXHunter · Post by **FDAXHunter** » Sat May 10, 2014 4:31 pm

dnsk:The seller of a corporate bond is subject to credit risk and buyer not.

This thread just got awesome. Chew

dnsk · Post by **dnsk** » Sat May 10, 2014 4:44 pm

In paper Brigo , etc Valuation with Credit Risk, Collateral & Funding Cost p.7 " ...At the first margin date, say t1 , the investor opens the account and posts collateral if he is out-of-the-money ". They did not specify an instrument there.

Is it the rule for any instrument? It does look strange if the buyer of the risky bond submit credit spread and open MtM account? or opening MtM account in the paper should be interpreted in other way?

Martinghoul · Post by **Martinghoul** » Sat May 10, 2014 6:15 pm

I don't quite know what to say, tbh...