Mark to Market
Also written MTM · Mark to Market (MTM) · Mark to market (MTM) · Marking to market · MTM settlement · Daily settlement · Mark-to-market (MTM) margin · Mark-to-market margin · Mark-to-Market (MTM)
The daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
In plain language
A futures contract may run for months. The profit and loss on it does not wait that long.
At the end of every trading day the exchange revalues every open position at the day's settlement price, collects the loss in cash from whoever lost and pays it in cash to whoever gained, and then treats that closing price as the new cost of the position for the next day.
The point is credit, not accounting. If a losing position were allowed to run for three months, the loss would grow to a size the loser might not be able to pay. Settling every evening keeps the exposure to one day's price move.
How it works
Three consequences follow from "the position restarts each day at the settlement price".
- Your cumulative MTM equals your total move. The daily amounts telescope: however many days you hold, the sum of the daily settlements is the entry price minus the exit price, times the lot.
- Initial margin is not a deposit against final loss. It is a buffer against one day's move, replenished daily. When MTM losses eat into it and the balance falls below requirement, you get a margin call and must top up, or the position is squared off.
- Cash moves even when you are right in the end. A position that finishes profitable can demand large cash payments on the way — which is why a hedger needs liquidity, not just a correct view.
In interest rate futures the daily settlement price used for MTM is the daily settlement price (DSP) computed by the exchange, and both MTM and final settlement are on a T+1 basis.
The formula
Day 1 MTM = (Settlement price − Trade price) × Lot size × Contracts
Day n MTM = (Today's settlement − Yesterday's settlement) × Lot size × Contracts
Long positions gain when the settlement rises; short positions gain when it falls.
A worked example
On 14 May 2024 a trader buys one Nifty May futures at 22,250, lot size 25.
Contract value = 22,250 × 25 = Rs 5,56,250
Initial margin at 10% = Rs 55,625
That evening Nifty May futures settle at 22,308.70:
MTM = (22,308.70 − 22,250) × 25 = 58.70 × 25 = Rs 1,468 credited
His position now starts tomorrow from 22,308.70, not 22,250. Carry the illustration two more days:
| Day | Settlement | Move | MTM (× 25) | Margin balance |
|---|---|---|---|---|
| Entry | 22,250.00 | — | — | Rs 55,625 |
| Day 1 | 22,308.70 | +58.70 | +Rs 1,468 | Rs 57,093 |
| Day 2 | 22,180.00 | −128.70 | −Rs 3,218 | Rs 53,875 |
| Day 3 | 22,060.00 | −120.00 | −Rs 3,000 | Rs 50,875 |
Check the telescoping: 1,468 − 3,218 − 3,000 = −Rs 4,750, and directly, (22,060 − 22,250) × 25 = −190 × 25 = −Rs 4,750. Identical, as it must be.
But look at the margin. At the day-3 settlement the contract is worth 22,060 × 25 = Rs 5,51,500, so 10% initial margin is Rs 55,150 against a balance of Rs 50,875. The trader gets a margin call for Rs 4,275 and must fund it before the next session — on a position that has moved less than 1% against him.
Why NISM asks about it
Chapter 15 (Introduction to Forwards and Futures) introduces MTM immediately after initial margin, with exactly the 14 May 2024 Nifty numbers used above. Chapter 20 repeats it for exchange traded interest rate futures, where MTM and final settlement are on T+1 and the daily settlement price is defined separately. Expect a one- or two-day MTM computation, and a conceptual question on why only the option seller faces MTM margin while both parties to a futures contract do.
Common exam traps
- MTM is settled in cash daily; it is not a book entry. Money actually leaves or enters the account each evening.
- The reference price resets every day. Day 2's MTM is measured from Day 1's settlement, not from your original trade price. Computing every day from the entry price double-counts.
- Initial margin and MTM margin are different things. Initial margin is posted to open the position; MTM margin is the daily profit-and-loss transfer.
- Forwards generally have no MTM. The workbook is explicit — in a forward, nothing settles until maturity, which is exactly where the counterparty risk builds up.
- In options only the writer is marked to market, because only the writer has an open obligation.
- A hedge that is "working" can still generate large MTM outflows while the offsetting gain on the physical portfolio is unrealised. That mismatch is a liquidity problem, not a hedging failure.
Where this is taught
- Series XIX-E · Chapter 12: Valuationintroduced here
- Series XIX-B · Chapter 8: Valuationintroduced here
- Series XVI · Chapter 3: Commodity Futuresintroduced here
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series XIX-C · Chapter 14: Valuationintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
- Series IV · Chapter 3: Exchange Traded Interest Rate Futuresintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series V-A · Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of units
- Series V-D · Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of units
- Series V-D · Chapter 15: Introduction to Forwards and Futures
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futures
Related terms
- DerivativeA contract whose value is derived from the value of something else — the underlying — rather than from anything the contract itself owns or produces.
- BasisThe difference between the spot price and the futures price of an asset — positive when spot exceeds futures, negative when futures exceeds spot, and zero at expiry.
- Futures contractA standardised forward traded on an exchange, where the exchange fixes every term except the price and the clearing corporation guarantees settlement, so neither side carries the other's default risk.
- Open interestThe total number of derivative contracts outstanding and not yet settled in an underlying — counted on one side only, because every long is matched by a short.
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- Independent ValuerThe valuer of a Category III AIF's unlisted holdings — not an associate of manager, sponsor or trustee, with 3 years' experience, and IBBI-registered with a professional membership or a CRA group entity.
- Valuation DayThe day, fixed in advance by a Category III AIF and disclosed in its offer documents, as on which its NAV is determined — at least monthly for open-ended funds and quarterly for close-ended ones.
- Off-Balance Sheet ExposureExposure a fund takes through leverage and derivative contracts to assets that are not its direct obligation — only margin and premium show in the books, but the fund bears the full risk and return.
- Amortized CostA debt security's purchase cost adjusted for the purchase discount or premium over its maturity — how a Category III AIF values unlisted securities with no ascertainable market, plus accrued interest.
- Volume Weighted Average YieldThe average yield of a debt security's trades, weighted by traded volume. Category III AIFs value T-bills and G-Secs on the VWAY of the last hour's trades, and other debt on the whole day's trades.
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Traded Debt SecurityA debt security a Category III AIF holds is "traded" on a given Valuation Day if trades in marketable lots were reported in it that day on a recognised stock exchange or the CCIL.
- Fair valuation principlesSEBI's ten principles requiring a mutual fund to value its holdings at realisable value, in good faith, under Board-approved and disclosed policies, so every investor entering or leaving gets a fair price.
- Interest Rate FuturesA standardised exchange-traded contract to buy or sell a notional government security, or an interest rate itself, at a price agreed today for settlement on a future date.
- Central counterpartyThe clearing corporation that interposes itself in every exchange trade, becoming buyer to every seller and seller to every buyer, so neither side carries the other's credit risk.
- Contract valuePrice or rate multiplied by the lot size or contract multiplier — the number margins, brokerage, transaction charges and regulatory fees are all computed from, and different for every contract.
- Net assetsThe unitholders' funds in a scheme: the market value of everything it owns, plus income accrued and receivables, minus what it owes to others — the figure NAV divides by the number of units.
- Non-traded securityA security (other than money market and debt) not traded on any stock exchange for thirty days before the valuation date, which the AMC must then value in good faith rather than at a market price.
- Accrual principleThe accounting rule that every expense and every income relating to a period is counted in that period whether or not it has been paid or received — so a scheme cannot show better profits by delaying payments.
- Interest rate riskThe risk that an investor in a debt instrument loses return because rates rise — existing instruments carrying the old, lower coupon fall in value until their yield matches the new market rate.
- Realised gainA gain a mutual fund scheme has actually banked by selling the security, as against a valuation gain, which sits in the NAV on paper and may never turn into money at all.
- Valuation agencyAn independent agency whose valuation matrix mutual funds must use to price non-traded and thinly traded debt; there have to be at least two, and AMFI has appointed CRISIL and ICRA.
- Tick valueThe rupee profit or loss on one contract when the price moves by a single tick — lot size divided by the quotation factor, multiplied by the tick size.
- ClearingThe daily accounting step that reconciles what every party owes and is owed on its open and closed positions, and turns a day of trades into one net obligation per member.
- Exchange traded derivativeA derivative traded on an organised exchange on standardised terms, with prices set by anonymous auction and performance guaranteed by a clearing corporation — as against a bilateral, customised OTC contract.
- HedgingTaking a derivative position that moves opposite to an exposure you already have, so gains on one offset losses on the other and the future rate is locked in at a known level.
- Base priceThe reference price a contract starts each trading day from — the theoretical futures price on the day it is introduced, and the previous day's daily settlement price on every day after.
- FBIL reference rateThe daily USD/INR (and EUR, GBP, JPY vs INR) benchmark rate published by Financial Benchmarks India Pvt Ltd around 1.30 pm; it is the final settlement price of INR currency futures and options.
- Currency futuresA standardised exchange-traded contract to buy or sell one currency against another on a future date at a price fixed today; in India, cash-settled in rupees, USD 1,000 a lot for USDINR.
- Margin on consolidated crystallized obligationPart of initial margin that blocks a client's net payable from closed-out futures profit or loss and option premium intraday, and all settlement obligations at end of day, until settlement.
- Total returnThe whole return on an investment for a period: periodic income such as interest, dividend or rent plus the gain or loss in the value of the investment itself.
- Value at RiskA statistical estimate of the most a position is likely to lose over a set holding period at a chosen confidence level — the idea behind the initial margin a clearing corporation charges on a derivatives trade.
- Liquid assetsThe collateral a clearing member deposits with the clearing corporation, valued daily after haircuts, which must cover MTM losses, VaR margin, extreme loss margin and base minimum capital.
- Open positionAn outstanding, unsettled long (buy) or short (sell) position in a contract; margins, exposure limits, daily MTM and corporate-action adjustments are all applied to open positions.
- Mark to Market (MTM) loss marginIn the cash segment, one of three margins a clearing corporation collects upfront: the loss on a member's outstanding settlement obligations, marked to the closing price, grossed across all clients.
- Closing Auction SessionA 20-minute call auction session, from 3:15 pm to 3:35 pm, being phased in to determine the closing price of stocks that have derivative contracts, replacing the last-30-minutes VWAP method for them.
- Daily Settlement PriceThe price at which every open futures position is marked and reset at the end of each day — the last 30 minutes' volume weighted average price of that contract, computed separately for each expiry.
- Physical settlementSettling a derivative on expiry by actual delivery of the underlying shares against payment. In India, all stock futures and options open at expiry have been physically settled since October 2019.
- Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
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