Mark to market is a process of daily settlement of the profit and loss resulting from the change in the security's market value until 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 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.
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:
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
501.5 and 502
|Day||Reference price for MTM (x)||Closing price (y)||P&L (y-x)||Daily MTM (P&L x Lot size)|
|4||501.5 and 502||502.3||0.5||5000|
Let us see how the MTM for fourth day is calculated below:
Reference price for MTM
|Day||Reference price for MTM||Selling price||Closing price||P&L||Daily MTM (P&L x Lot size)|
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.