Represents the price at which the asset can be bought (or sold) in the open market. the mid-market price is often used (the mid price between bid price and offer price)
Advantages
-
objective
- easily understood by most stakeholders
- readily available (for many assets)
- reflects the price at which the asset can currently be bought (or sold)
- Allow for a more realistic and objective comparison between different companies.
- remove much of the prudence and subjectivity inherent in traditional actuarial valuations.
Disadvantages
-
it can fluctuate wildly in the short term, which not reflect changes in the expected future proceeds.
a very different valuation result may be obtained depending on the exact date of the valuation …
which may not reflect any real change in the ability to meet the promised liabilities.
-
can be difficult to value liabilities consistently as there is usually no corresponding market for liabilities
-
not available for all assets e.g. property, unquoted shares
-
cannot be easily used to assess whether the asset is currently cheap or dear
-
A smoothed market value may be used to reduce the impact of short-term volatility (e.g. an average of the market value over the last month).
However, this introduces an element of subjectivity into the valuation method and makes
it even more difficult to value the liabilities consistently (as the appropriate discount
rate for valuing the liabilities cannot be readily determined).