Mark to model

Mark-to-Model refers to the practice or pricing a position or portfolio at prices determined by financial models, in contrast to allowing the market to determine the price. Often the use of models is necessary where a market for the finanical product is not available, such as with [[complex financial instruments]]. The shortcoming of Mark-to-Model is that it gives an artifical illustion of liquidity, and the actual price of the product depends on the accuracy of the finanical models used to estimate the price. ^[1]

Enron Collapse

The collapse of Enron is a well known example of the risks and abuses of Mark-to-Model pricing. Many of Enron's contracts where difficult to value since there was not a publicly market to trade these financial products that it sold to use a reference point, thus the use of computer-models were used to generate prices.mark-to-market prices.^[2]

When Enron's profits began to fall with increased competition, accounts manipulated the mark-to-martket models to Eron's advantage. to its advantage to put a positive spin on its earnings. ^[3]

References

^ Gastineau et al., The Dictionary of Financial Risk Management
^ Fusaro et. al,, What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in U.S, Page 35
^ Fusaro et. al,, What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in U.S, Page 35

[1] Gastineau et al., The Dictionary of Financial Risk Management

[2] Fusaro et. al,, What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in U.S, Page 35

[3] Fusaro et. al,, What Went Wrong at Enron: Everyone's Guide to the Largest Bankruptcy in U.S, Page 35

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