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What is Mark to Market (MTM)?

Mark to Market (MTM) in a futures contract is the process of daily settlement of profit and losses arising due to the change in the security’s market value until it is held.

The MTM calculations are done daily after the trading hours, based on the closing price for the day. The P&L is settled on the same day to your trading account and won’t reflect in your positions on the next day.

To verify the values of your futures contract position, you use the below formulas:

  1. Change in futures contract value. = Future contract Price of Current Day – Closing Price as of Prior Day
  2. P&L for the day = Price Change in futures contract value * Number of lots
  3. Total P&L = the sum total of all the daily P&L until the futures contract position is held.

Here is an example to help you understand MTM better -

Buy price - Rs 100

Sell price - Rs 102

Lot Size - 9500

Profit on the trade: 102-100 =Rs 2/-

Total Profit: 9500*2 = Rs.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 under -

we have two reference values. Rs.101.5/- is the previous day’s close, i.e. 3rd day’s close, and Rs.102 is the price at which the position was squared off.

As you can see, the sum of the daily MTM leads us to the same P&L tally, i.e. Rs.19,000/- profit.

Further on day 4, after you have sold the contract at 102, any changes in the contract price will not affect your P&L. Adhering to the selling price of 102, the profit of Rs.4750/- will be credited to your trading account by the end of the day.

Note:

  1. MTM is calculated for future contracts only and not for options or equity stocks.
  2. MTM is populated on a live basis but updated in the ledger at the end of the day.
  3. 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. Further, it will be updated on Kite at the beginning of the next day.
  4. If your position is in loss and you do not have sufficient balance in your account the position might be squared a margin penalty will be levied.
  5. If the security is not traded for the particular day, the latest available closing price is considered for MTM.
  6. MTM losses on positions will show up as unrealised profit in Kite until squared off.

You can read more about MTM with examples at Varsity.