How to understand the credit/debit on funds statement when trading F&O?
The fund statement displays various entries related to F&O obligations, margin debits, margin reversals, etc., for F&O trading. The F&O obligation amount includes the payable or receivable marked-to-market (M2M) amount. For options trades, settlement is based on the net premium receivable or payable. However, the obligation amount is calculated using the M2M price when trading futures contracts. At the end of each day, exchanges mark all open futures positions to the closing settlement price for that day and either credit or debit the corresponding amount in the client's fund statement. To learn more, see What is Mark to Market (MTM)?
- If a futures trade is not closed during the day, the settlement amount will be determined by the difference between the trade price and the closing settlement price, which will then be settled to the account.
- In the case of a carried-forward futures position from the previous day that is still being held, the settlement amount will be based on the difference between the previous day's closing price and today's closing price, which will be settled to the account.
- If a carried-forward futures position from the previous day is squared off, the settlement amount will be determined by the difference between the previous day's closing price and the square-off price, which will then be settled to the account.
The obligation amount, which takes into account all charges for the day, can be verified on the contract note. How to download contract notes?
The practice of marking-to-market (M2M) is implemented in futures trading due to the unlimited risk involved. Its purpose is to prevent default by ensuring that any losses incurred by one client are collected on the same day and credited to the client making profits. The client experiencing the loss must then ensure that there is sufficient margin in their account to continue holding the position, thus mitigating counterparty risk.
In the case of short option positions, M2M is not applied as in futures. However, the margin required to hold short options increases as the options move in the money, causing losses for the holder of the short options. This mechanism ensures that clients experiencing losses must contribute additional funds to minimize default risk.
Consequently, Kite displays only the overall profit and loss (P&L) as well as the current day's P&L. The fund statement on Console will reflect multiple credits or debits. Each day the position was held will have a separate entry in the funds statement. To learn more about the entries on funds statement, see What do these funds statement entries mean?