Download This PaperStructured Finance and Mark-to-Model Accounting: A Few Simple Illustrations
34 Pages Posted: 10 Jul 2010 Last revised: 30 Jan 2011
Date Written: June 10, 2010
Abstract
We review the development of structured financial products, discuss their accounting treatment and illustrate their valuation using simple numerical examples. The crucial element we incorporate is the possibility that the underlying assets in structured financial products have correlated returns. The benefit of structured finance is that it uses diversification to protect the senior tranches’ cash flows. However, when the underlying assets have correlated returns diversification is not as effective. Normally structured financial products would be marked “to market” obviating the need for analytical valuation techniques. Current accounting standards, however, have significant provisions for valuing structured financial products based on analytically derived expectations of future cash flows, especially when markets are illiquid. Therefore, it is important for both preparers and users of accounting information to understand how underlying economic fundamentals, such as the correlation in returns, affect expectations of future cash flows.
Keywords: Mark-to-Model, Structured Finance
Suggested Citation: Suggested Citation
Eric Edward Spires
Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )
2100 Neil Avenue
Columbus, OH 43210
United States
Richard A. Young
Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )
2100 Neil Avenue
Columbus, OH 43210
United States
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