Daily Marking To Market Of Futures

Why Futures Are Marked to Market Daily

A futures position does not wait until its delivery date to recognize price movements. Instead, the exchange calculates gains and losses using each day's settlement price and transfers the resulting cash between the parties. This process is called daily marking to market. The calculation is simple, but it depends on getting three details right: whether the position is long or short, how large each contract is, and how many contracts were held during the price movement.

Daily settlement changes the cash balances associated with a position. It does not, by itself, change the quoted futures price or the number of contracts held. For example, a long position remains a long position after a settlement gain is paid; the cash transfer records the gain rather than changing the contract's direction.

Definition: Suppose a futures contract is quoted in dollars per unit of the underlying, and each contract represents $M$ units. A position of $N$ contracts held from one settlement to the next has a daily settlement cash flow of $NM(F_t-F_{t-1})$ dollars if it is long, where $F_{t-1}$ and $F_t$ are the previous and current settlement prices. A short position has the opposite cash flow. Equivalently, let $q$ be the signed number of contracts, positive for long and negative for short; then the cash flow is $qM(F_t-F_{t-1})$.

A positive result is cash received by the position holder, and a negative result is cash paid. The multiplier $M$ converts a price change per unit into a dollar change per contract. If the contract specifications already state a dollar value per quoted point, use that value as the multiplier.

Why the Daily Settlement Formula Holds

A futures contract's price exposure is linear: for one long contract representing $M$ units, a rise of one dollar per unit corresponds to a gain of $M$ dollars, while a fall of one dollar per unit corresponds to a loss of $M$ dollars. For $N$ long contracts, multiply that amount by $N$. A short position reverses the sign, because it benefits when the futures price falls. Thus the cash flow over a settlement interval is the signed position multiplied by the price change and contract size.

\text{Daily settlement cash flow}_t = qM(F_t-F_{t-1}).

The formula can also be justified by adding the daily changes. If the same $q$ contracts remain open for several consecutive settlements, the total is

\sum_{t=1}^{T} qM(F_t-F_{t-1}) = qM\big[(F_1-F_0)+(F_2-F_1)+\cdots+(F_T-F_{T-1})\big] = qM(F_T-F_0).

The intermediate settlement prices cancel. This telescoping result is a useful check when the position stays unchanged. If the number of contracts changes, apply the formula separately to each interval using the position actually held over that interval; a single fixed-position calculation no longer applies.

The calculation assumes that the stated position is held throughout the settlement interval, the quoted price and contract multiplier are in consistent units, and the given settlement prices are the relevant marks. Ignore fees, taxes, and interest on cash balances unless the problem explicitly includes them. When a position is opened or closed between settlements, account for the price change only over the period that the relevant contracts were held.

Worked Example: A Long Position with a Partial Close

A trader holds 4 long futures contracts, each representing 25 units. The settlement price is $32.00 on the first date, $31.20 on the next, and $31.60 on the following date. Immediately after the second settlement, the trader closes 1 contract. Find the cash flow for each settlement interval and the cumulative cash flow. Assume the prices are dollars per unit, there are no fees, and the position does not change before either settlement.

Method. Use the signed-position formula for each interval. The position is 4 long contracts for both price movements: the close occurs after the second settlement.

First interval. The price change is $31.20-32.00=-0.80$ dollars per unit. The contract size across all 4 contracts is $4(25)=100$ units. Therefore,

4(25)(31.20-32.00)=100(-0.80)=-\$80.00.

Second interval. The price change is $31.60-31.20=0.40$ dollars per unit. Four contracts are still held during this interval, so

4(25)(31.60-31.20)=100(0.40)=+\$40.00.

After this settlement, closing one contract changes the position to 3 long contracts for any later interval. It does not revise either cash flow already calculated. The cumulative cash flow is $-\$80.00+\$40.00=-\$40.00$.

Check. Across the two intervals, the price fell overall by $31.60-32.00=-\$0.40$ per unit while 4 contracts were held, giving $4(25)(-\$0.40)=-\$40.00$, the same total. This check works because the position stayed at 4 until the second settlement.

Common mistake avoided. Using 3 contracts for the second interval gives $3(25)(0.40)=\$30.00$, but that count applies only after the settlement and close. The correct second-interval cash flow is $40.00.

Worked Example: Settlement Cash Flows on a Short Position

A producer has 5 short futures contracts on a hypothetical commodity. Each contract represents 2,000 kilograms, and prices are quoted in dollars per kilogram. The settlement price rises from $3.40 to $3.46 and then falls to $3.31. The short position remains unchanged. Find each daily cash flow and the cumulative cash flow. Assume no fees or other cash movements.

Method. Represent the short position by $q=-5$ and use $M=2{,}000$ kilograms per contract. A price rise should produce a loss to the short; this sign check helps catch errors.

First interval. The price change is $3.46-3.40=\$0.06$ per kilogram. Hence

(-5)(2{,}000)(0.06)=-\$600.00.

The rising price creates a $600.00 cash outflow for the short position.

Second interval. The price change is $3.31-3.46=-\$0.15$ per kilogram. Therefore,

(-5)(2{,}000)(-0.15)=+\$1{,}500.00.

The falling price creates a $1,500.00 cash inflow. Adding the two amounts gives $-\$600.00+\$1{,}500.00=+\$900.00$.

Check. The price has fallen overall by $3.31-3.40=-\$0.09$ per kilogram. The total for the unchanged short position is $(-5)(2{,}000)(-0.09)=+\$900.00$, as calculated by summing the daily amounts.

Common mistake avoided. Treating a short position like a long position would make the first cash flow positive. The signed position $q=-5$ correctly reverses the direction of the price effect.

Worked Example: Adding and Closing Contracts Between Settlements

An investor holds 2 long futures contracts, each representing 50 units. The settlement price moves from $2,500 to $2,520. Immediately after that settlement, the investor adds 1 long contract. The next settlement is $2,514; immediately after it, the investor closes 1 contract. The following settlement is $2,530. Find the cash flow at each settlement and the total. Assume the added contract is held from the first settlement at $2,520, the closing trades occur just after settlements, and there are no fees.

Method. Split the calculation at each time the position changes. Use only the contracts held over that interval; the multiplier is 50 units per contract.

First interval. Two contracts are held while the price rises by $2{,}520-2{,}500=\$20$ per unit:

2(50)(20)=+\$2{,}000.00.

Second interval. Three contracts are held after the additional long contract is opened. The price change is $2{,}514-2{,}520=-\$6$ per unit:

3(50)(-6)=-\$900.00.

Third interval. After one contract is closed, 2 long contracts remain. The price rises by $2{,}530-2{,}514=\$16$ per unit:

2(50)(16)=+\$1{,}600.00.

The total cash flow is $+\$2{,}000.00-\$900.00+\$1{,}600.00=+\$2{,}700.00$. The cumulative balances after the first, second, and third settlements are respectively $2,000.00, $1,100.00, and $2,700.00.

Check. One of the original contracts is closed at $2,514. Its net price change from $2,500 to $2,514 is $14, giving $50(14)=\$700.00$. The other original contract remains open to $2,530, giving $50(2{,}530-2{,}500)=\$1{,}500.00$. The added contract changes from its opening price of $2,520 to $2,530, giving $50(10)=\$500.00$. Together, $700+1{,}500+500=\$2{,}700.00$, which agrees with the daily total.

Common mistake avoided. Applying the final position of 2 contracts to all three intervals ignores the added contract's loss in the second interval. Applying 3 contracts to the third interval ignores the close. Position changes divide the calculation into intervals with different contract counts.

Interpreting the Cash Flows

Daily marking to market separates the movement in the quoted futures price from the cash paid or received as that movement occurs. A settlement gain or loss is an actual cash adjustment under the standard futures settlement process, not a change to the number of contracts. The position continues to be described by its direction, contract count, and contract specifications.

For a constant position, cumulative daily cash flows reproduce the gain or loss implied by the total change in settlement price over the same period. When contracts are added or closed, each contract's contribution depends on the price change during the time it was held. This is why a timeline of settlement prices and position changes is often the safest setup.

Write down whether the position is long or short before calculating.
Convert the quoted price movement into dollars using the contract multiplier.
Use the position held during each interval, not the position held at the end of the entire timeline.
Keep the sign of each cash flow: gains are positive and losses are negative.
Check an unchanged position by comparing the sum of daily price changes with the total price change.

These calculations describe settlement cash flows only. They do not determine how much cash must be deposited or when an account may require additional funds; those depend on separate margin rules. The distinction matters because a futures position can have a daily cash loss even though its contract count and quoted position remain unchanged.

Key takeaway: For each interval, multiply the signed number of contracts by the contract size and by the change in settlement price. If the position changes, start a new interval at the price when that change takes effect.

Check Your Understanding

For each question, calculate the settlement cash flows using the position held over each stated interval. Ignore fees and other cash movements.

A trader holds 3 long contracts, each representing 40 units. The settlement price falls from $18.25 to $18.10. Find the cash flow. (Answer: $-\$18.00$)
A short position consists of 4 contracts, each representing 250 units. The price rises from $72.40 to $72.58. Find the settlement cash flow. (Answer: $-\$180.00$)
An investor holds 2 long contracts, each representing 1,000 units. Settlement prices are $6.20, $6.05, and $6.17. Find each interval's cash flow and the total. (Answer: $-\$300.00$, $+\$240.00$; total $-\$60.00$)
A trader holds 5 long contracts, each representing 10 units. The price moves from $1,200 to $1,212; immediately after that settlement, 2 contracts are closed. The next settlement is $1,208. Find both cash flows and the total. (Answer: $+\$600.00$, $-\$120.00$; total $+\$480.00$)
An investor holds 2 long contracts, each representing 25 units, as the settlement price rises from $80.00 to $83.00. The investor then adds 1 long contract. The next settlement is $81.50; immediately after that settlement, 1 contract is closed. The following settlement is $82.30. Find the three interval cash flows and their total. (Answer: $+\$150.00$, $-\$112.50$, $+\$40.00$; total $+\$77.50$)

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