Crash Explainer 2: Valuation

To arrive at the numbers needed to express the capital adequacy ratios required by lenders and regulators, a company must put a dollar value on every asset it holds.

If you're using mark-to-market valuation you assign value based on what someone would pay for an asset now. Assets without a ready market must be valued using more obscure methods* (see this post and this post for more about valuation models).

Our hypothetical company has large holdings of an asset for which no market exists. So, it uses projections and mathematical models to assign value to these assets.

NEXT: Asset securitization



* This uncertainty is one reason some advocate book-value accounting over mark-to-market. Book-value = the price you paid - depreciation. So, the collapse of the market for your asset is irrelevant.