What is Mark to Market (MTM)?

Mark to Market (MTM) is, conceptually, a process of valuing your positions / investments at the current market price of your holdings, i.e. marking to the current market price. MTM is a reference to track the Unrealized Profit and Loss of your open positions.

In case of Derivatives and Equity Margin positions, where payment of 100% of the value of the scrip / underlying is not required to be made, and only margin is charged, MTM is the daily settlement of the profit and loss resulting from the change in the security's market value till it is held.

For example, suppose you have a stock position worth Rs.2 lakh and your broker needs 25% or Rs.50000 as margin. The next day, the stock’s value falls to Rs.1.8 lakh, then Rs.20000 gets deducted from your margin balance. This is called 'Marking to the Market’.

The MTM calculations are done on a day to day basis, post the trading hours, based on the closing price for the day. The P&L is settled on the same day, and hence your positions would not show the same on the next day. You can refer to the below formulas to verify the values with respect to your futures contracts.

Change in futures contract value = Future contract price of current day - Closing price as of prior day

P&L for the day = Price change in futures contract value * Number of lots

Total P&L = the sum total of all the daily P&L until the futures contract position is held.

Let us understand this using an example:

Buying price = Rs.500

Selling price = Rs.502

Lot Size = 10000

Profit: 502-500 =Rs.2

Total Profit: 10000*2 = Rs.20,000

This gives you the overall P&L.

Now let us see how it would look like with MTM

Consider the closing prices of WIPRO for the 4 days are 501, 500, 501.5, and 502.3

Let us see how the MTM for fourth day is calculated below:

Since the contract was squared off at Rs.502 on Day 4, any further change in the contract price will not affect the P&L and the profit of Rs.5000 will be credited to your trading account.