In the case of a company, MTM helps evaluate its real-time financial status. Besides companies, this valuation technique can be used for personal accounts or investment portfolios, financial instruments like mutual funds and even in the securities market for futures.
Benefits
Transparency
It helps assess the real worth of an instrument or company, allowing decision-making based on the latest pricing.
Accuracy
It helps give the real-time valuation of an asset, thereby making a more accurate assessment of an asset or company’s performance.
Risk management
It can help investors manage risk in their portfolios by knowing the price fluctuations and taking decisions accordingly.
Performance evaluation
Investors can easily track and evaluate the current performance of their investments and make any necessary adjustments.
Drawbacks
Inaccurate in volatility
It does not give correct valuation during volatile periods, when the price fluctuation is too frequent, and can magnify the distress.
Systemic risks
It does not take into account any systemic risks, for which other assessment tools need to be used.
MTM vs historical cost approach
The main difference between the two is that while MTM uses the current price to value an asset or liability, the historical cost approach uses the original purchase price. This makes the former valuation more transparent and accurate in prevailing market conditions. The latter is best used for long-term assets or instruments, while the former is better for more actively traded assets.