Explain mark-to-market on a derivative.
A core Corporate Treasury interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
MTM = current market value of the derivative position. For a forward: difference between contracted rate and current forward rate for the remaining term, discounted to present value. For a swap: PV of remaining fixed payments vs. PV of expected floating payments. MTM goes to P&L (unless hedge accounting applied, then OCI for cash flow hedges).
WHAT INTERVIEWERS LISTEN FOR
- ✓Current market value of derivative
- ✓Forward: rate difference discounted
- ✓Swap: PV fixed vs floating
- ✓MTM goes to P&L
- ✓Hedge accounting: OCI for cash flow hedges
COMMON MISTAKES
- ✗Confusing MTM with notional amount
- ✗Ignoring discounting for forwards
- ✗Forgetting hedge accounting treatment
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