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Marking to Market

Marking to market is the daily process by which the clearing house revalues every open futures position at the exchange settlement price and settles the cash difference through margin accounts. Gains are credited and losses are debited the same evening or the next morning, so unrealised profit and loss never accumulates. This daily settlement is the operational mechanism that lets futures support far larger leverage than forwards while keeping counterparty credit exposure to roughly one day of price movement.

Why it matters

A forward contract leaves all the gain or loss unresolved until maturity, so a counterparty could quietly accumulate large losses before defaulting. Futures avoid this by replaying the contract every day. At the close, the exchange takes a single official price, computes how much each side owes, and moves cash overnight. By morning the slate is clean. This is why a futures contract has zero economic value at the end of each trading day. Marking to market converts a long-dated promise into a sequence of one-day exposures, which is exactly what makes central clearing scalable.

Formulas

Daily mark-to-market P&L, long side
P&Lt=(Ftโˆ’Ftโˆ’1)ร—multiplierร—N\text{P\&L}_t = (F_t - F_{t-1}) \times \text{multiplier} \times N
Cumulative P&L over $n$ days
ฮ n=โˆ‘t=1n(Ftโˆ’Ftโˆ’1)ร—Mร—N=(Fnโˆ’F0)ร—Mร—N\Pi_n = \sum_{t=1}^{n} (F_t - F_{t-1}) \times M \times N = (F_n - F_0) \times M \times N
Telescoping sum collapses to total price change times multiplier and contracts.

Worked examples

Scenario

Day 0 open long at F0=100F_0 = 100. Day 1 settlement F1=103F_1 = 103. Day 2 settlement F2=99F_2 = 99. Multiplier M=100M = 100, single contract.

Solution

Day 1 mark-to-market =(103โˆ’100)ร—100=+= (103 - 100) \times 100 = +300, credited to the long. Day 2 mark-to-market =(99โˆ’103)ร—100=โˆ’= (99 - 103) \times 100 = -400, debited. Cumulative =(99โˆ’100)ร—100=โˆ’= (99 - 100) \times 100 = -100. The telescoping sum confirms the daily flows aggregate to the total price change.

Scenario

An Australian fund holds 50 long ASX SPI 200 futures. Multiplier A$25. Settlement moves from 7,420 to 7,395 across one trading day.

Solution

Mark-to-market =(7,395โˆ’7,420)ร—25ร—50=โˆ’= (7{,}395 - 7{,}420) \times 25 \times 50 = -A$31,250 debited overnight to the fund's margin account at ASX Clear (Futures). If the running balance now sits below maintenance margin, the fund faces a margin call the next morning.

Common mistakes

  • โœ—Daily settlement adds risk. It reduces counterparty risk by preventing unrealised losses from accumulating. The Hong Kong Futures Exchange near-collapse in 1987 is the textbook case of how a clearing house can fail when daily marks are not strictly enforced.
  • โœ—Mark-to-market price equals the last traded price. Exchanges use an official settlement price computed from a defined procedure such as a volume-weighted average over the closing window. This is published by the exchange and is the only price used for daily P&L calculations.
  • โœ—Futures and forwards always have the same price. They are theoretically equal when interest rates are constant. With stochastic rates, daily settlement gives futures a slight advantage when prices and rates are positively correlated, so prices diverge. Cox, Ingersoll and Ross (1981) formalised this gap.

Revision bullets

  • โ€ขDaily revaluation of positions at the official settlement price
  • โ€ขCash moves between margin accounts each evening
  • โ€ขResets contract value to zero each night
  • โ€ขLimits counterparty risk to roughly one day of price movement
  • โ€ขKey operational difference between futures and forwards

Quick check

Marking futures positions to market primarily benefits:

A short position in three ASX SPI 200 futures is settled from 7,300 to 7,350 in one day, multiplier A$25. The mark-to-market flow is:

Connected topics

PayoffInit. MarginMargin Call

In learning paths

Futures Path

Sources

  1. Hull (2022), ยง2.5
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Defines marking to market and works through the daily P&L cash flows in detail.
  2. Cox, Ingersoll & Ross (1981)
    Cox, John C., Jonathan E. Ingersoll Jr., and Stephen A. Ross. The Relation between Forward Prices and Futures Prices. Journal of Financial Economics, 9(4), 1981, pp. 321 to 346.
    Foundational paper formalising why daily settlement makes futures prices differ from forward prices when interest rates are stochastic.
  3. BIS-IOSCO PFMI Principle 6
    Bank for International Settlements and IOSCO. Principles for Financial Market Infrastructures, Principle 6. BIS, 2012.
    Sets the international standard requiring daily mark-to-market of cleared derivatives positions.
  4. ASX Clear (Futures) Operating Rules
    Australian Securities Exchange. ASX Clear (Futures) Operating Rules and Procedures. ASX, 2024.
    Specifies the daily settlement procedure used by the Australian central counterparty for futures.
How to cite this page
Dr. Phil's Quant Lab. (2026). Marking to Market. Derivatives Atlas. https://phucnguyenvan.com/concept/marking-to-market
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