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With the noise level about accounting practices and disclosure lately, I've
had some discussion about what should be accounted for with derivatives, and
I'd appreciate any comments that address this issue. For example, the
purchase and/or sale of a futures contract explicitly incurs a liability,
however, the amount of the liability is unknown. Generally, one's accounts
reflect the amount of margin applied to the transaction and not the inherent
contingency of the liability.
The amount of the contingency of loss comes more into focus at the moment,
and therefore how should one account for it. Marking to market the daily
profit and/or loss incurred while a futures contract is current or open is
an approach, but the contingency of the full exposure isn't considered
within a balance sheet (this way). Analogously one could say that a
portfolio of stocks also has a "disastrous contingency" which isn't account
for.
Might it be necessary to consider the notional value of a futures contract
as an asset and its corresponding liability is that amount less the amount
of margin held in a brokers account or paid? That would be more in line with
how the value of a portfolio is represented, which is also marked to market.
Colin West
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