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    Accounting derivivatives

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    The megabanks hold a total of about $210 trillion dollars in derivatives, nearly all of which are not traded on transparent exchanges but instead are traded over the counter (OTC). Zero Hedge recently posted an illuminating blog entry on the business of derivatives trading and profit manipulation at the banks. According to Zero Hedge Bank of America's entire profit would have been wiped out under mark-to-market accounting. All of the bank's profit resulted from the mark-to-model accounting method permitted since 2009 when the FASB promulgated Staff Position 157-4. Trading of complex derivatives has always involved a subjective determination of "fair value." So subjective that both parties to a derivatives transaction can, in fact, claim profits on the same derivative transaction. In fact, after Lehman's bankruptcy collateral apparently was wildly up for grabs due to the vagaries of valuing derivatives positions. All of this means that while derivatives are technically a zero-sum game (negative sum when substantial transactions costs are included) the megabanks still profit mightily in this market because of imperfect accounting.

    1. How does mark-to-market work in accounting?
    2. Why under the current accounting derivative rules can two parties to a bi-lateral contract both claim profits?


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    Solution Preview

    How mark-to-market works in accounting?

    Mark-to-market works in accounting through the use of measuring the fair value of accounts that have a propensity to change overtime wherein these are characterized by assets and liabilities. The mark to market is predicated upon providing the market with a ...

    Solution Summary

    Accounting derivatives are examined for mega-banks.