Whenever possible, mark to market

Marking to market is the process of regularly evaluating a portfolio on the basis of
its prevailing market price or liquidation value. Even if you use hedge accounting, a
person separate from the dealer using quotes from multiple dealers should perform
it on a regular basis, and immediately report increasing divergences between market
and theoretical results. Unfortunately, mark to market is often transformed in mark
to model, since illiquid or complex assets are only priced accordingly to proprietary
in-house models.

When mark to market is impossible (typically when the trading room is the unique
or leading market for an instrument), one should identify the sources of the majority
of risk and reserve a cushion between the mark to model value and those of other
models. 435