Mark to Market
Also written MTM · Mark to Market (MTM) · Mark to market (MTM) · Marking to market · MTM settlement · Daily settlement
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-C · Chapter 14: Valuationintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series IV · Chapter 3: Exchange Traded Interest Rate Futuresintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
- Series XVI · Chapter 3: Commodity Futuresintroduced here
- Series XIX-B · Chapter 8: Valuationintroduced here
- Series V-D · Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of units
- Series V-A · 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.