Week 2 Discussion Bord: Fin 640 Derivatives. Letter

Hi, Gary,

The information you gave about the National Futures Association is very good. After reading it, there is no need to search more for the facts about it. It was also important to mention marked-to-market accounting and clearing house concerning futures and the way you did it helped me to understand the issue better. Line and Tiffany asked several questions in their feedbacks and I would like to go further into details.

The first question was how a clearing house eliminates risks. The clearing house organizes the trade process. It sets the requirements and obligations of each side according to the information about the transactions. (Rolnick, Smith & Weber, 2000) The organization has a fund from which the losses are paid and checks whether the companies are credit worthy. In addition, the clearing house is an independent side that evaluates trades objectively.

The second question was about the ways mark-to-market accounting benefits the firms that use it and whether it points out other financial areas of concern. An important thing about mark-to-market accounting is that it alters the balance information according to the current market conditions. That is why the results are always precise and up to date. Though this method has a positive side, it meats certain criticism as well. (Wallison, 2008) It is considered to give actual value, but it is not the best one often. In addition, mark-to-market accounting contributes to negative effects like pro-cyclicality in the bank capital.

References

Barr, C. (2008, November). Fair value: the pragmatic solution. CNN Money

Rolnick, A. J., Smith, D.B., & Weber, W. E. The Suffolk. (2000, Spring). Bank and the Panic of 1837. Federal Reserve Bank of Minneapolis Quarterly Review, 24 (2)

Wallison, P. J. (2008, July ). Fair Value Accounting. A Critique. AEI