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What is mark-to-market (MTM) in futures?

Futures and Options
2 min Read Jul 3, 2024
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The world of futures trading operates on a dynamic stage, where prices constantly fluctuate. To ensure fair and transparent settlements, the concept of Mark-to-Market (MTM) takes centre stage. This blog delves into the intricacies of MTM, explaining its mechanics, significance, and how it impacts your trading decisions.

Mark-to-market in futures trading

Unlike stock purchases where you settle at the trade price, futures contracts are marked to market daily. This means:

  • Every open position is revalued at the end of each trading day. This revaluation reflects the current settlement price of the underlying asset (stock, commodity, etc.) for the specific futures contract.

  • The difference between the entry price (your initial purchase/sale price) and the current settlement price determines your unrealized profit or loss (P/L). This P/L is then credited/debited to your trading account.

Why is mark-to-market important?

MTM serves several crucial purposes in futures trading:

  • Reduces Counterparty Risk: By daily settlement of P/L, MTM minimises the risk of default by either party in the contract.

  • Ensures Transparency: MTM provides daily clarity on the value of your open positions, reflecting current market conditions.

  • Facilitates Margin Management: MTM helps maintain adequate margins in your trading account. If your unrealized losses exceed the margin requirement, you might receive a margin call, prompting you to deposit additional funds or close losing positions.

  • Encourages Active Management: Daily P/L updates motivate traders to actively monitor their positions and make informed decisions about holding, exiting, or adjusting them based on market movements.

Step-by-step breakdown

Here's a simplified breakdown of the MTM process:

  1. You enter a futures contract: You buy or sell a futures contract at a specific price (entry price).

  2. Daily Price Movements: Throughout the trading day, the price of the underlying asset fluctuates.

  3. End-of-Day Settlement: At the close of the trading day, the settlement price for the futures contract is determined.

  4. MTM Calculation: The difference between your entry price and the current settlement price is calculated.

  5. P/L Adjustment: The unrealized P/L is credited/debited to your trading account, reflecting your current position value.

Impact of mark-to-market in futures trading

Understanding MTM is crucial for making informed trading decisions:

  • Planning for Volatility: Since MTM reflects daily price movements, factor in potential volatility when entering futures contracts. Consider stop-loss orders to manage risk and limit potential losses.

  • Margin Management: Maintain sufficient margin in your account to cover potential MTM losses and avoid margin calls.

  • Active Monitoring: Regularly monitor your open positions and MTM P/L to make timely decisions based on market conditions and your trading strategy.

Conclusion

Mark-to-market is an essential element in futures trading, ensuring daily settlements, promoting transparency, and facilitating responsible margin management. By understanding MTM and its implications, you can navigate the dynamic world of futures trading with greater confidence and make informed decisions to achieve your trading goals.

Remember: Futures trading carries inherent risks. Consult a qualified financial advisor to assess your suitability for futures trading and develop a sound trading strategy.