MTM or mark-to-market in futures is a process of revaluing open futures contracts at the end of each trading day to determine the profit or loss that has occurred due to changes in the price of the underlying asset. The mark-to-market process involves calculating the difference between the contract's entry price and the contract's current market price and settling the profit or loss in the trader's account. This is done to ensure that traders have enough margin in their Zerodha account to cover the potential losses from their open positions.

After the trading hours, the MTM calculations are performed daily based on the day's closing price. On the same day, the P&L is settled to the trading account and will not be reflected in the positions on the following day.

The values of the futures contract position are calculated as follows:

1. The change in the value of a futures contract can be calculated as the difference between the futures contract price of the current day and the closing price of the prior day.
2. The P&L for the day can be calculated by multiplying the price change in the futures contract value by the number of lots.
3. The total P&L can be obtained by summing up all the daily P&L until the futures contract position is held.

Example Scenario

1. Buy price - ₹100.
2. Sell price - ₹102.
3. Lot Size - 9500.
4. Profit on the trade: ₹102 - ₹100 = ₹2.
5. Total Profit: 9500 * ₹2 = ₹19,000.

While the above gives the overall P&L, let’s apply MTM for the same position as a table. Assume the closing prices of SAIL for the 4 days are 101, 100, 101.5, and 102.3.

MTM on the fourth day is calculated as follows:

Total P&L: 14250 (Sum of the MTM of the first three days) + 4750 (P&L of the 4th day) = 19000.

Two reference values are available - ₹101.5 as the previous day's close, i.e. 3rd day's close, and ₹102 as the price at which the position was squared off. The sum of the daily MTM leads to the same P&L tally, i.e. ₹19,000 profit. From day 4 onwards, any changes in the contract price will not impact the P&L after selling the contract at ₹102. The profit of ₹4,750, adhering to the selling price of ₹102, will be credited to the trading account by the end of the day.

Did you know?

• MTM calculation is applicable only for future contracts and not for options or equity stocks.
• MTM is updated on a live basis but will reflect in the ledger only at the end of the day.
• The MTM realised P/L for a closed position will not reflect in Kite during the day but will be updated in your console ledger at the end of the day. It will reflect on Kite the next day.
• If the position is in loss and there is insufficient balance in the account, the position may be squared off, and a margin penalty will be levied.
• If the security is not traded on a particular day, the latest available closing price is considered for MTM.
• MTM losses on positions will show up as unrealised profit in Kite until squared off.

To learn more about MTM, visit zerodha.com/varsity/chapter/margin-m2m.