How Daily Mark-to-Market Settles a Closed Futures Position

Summary

The document clarifies when gains and losses from a futures position become cash. A trader who enters a long futures contract and later closes it with an offsetting short position might mistakenly expect the combined contract payoff to occur at the original contract’s expiration. The explanation emphasizes that futures are marked to market daily: account cash changes as the futures price moves, so gains or losses accumulate before the position is closed.

By the time the trader closes the position, the accumulated changes reflect the difference between the futures price at entry and at exit. Once the position is closed, those daily movements stop; the trader no longer holds exposure through the contract’s remaining term. The example is conceptual and does not cover margin rules, transaction costs, clearing details, or differences among futures markets. Its central lesson is that the terminal payoff algebra should not be mistaken for the timing of futures cash flows.

Key ideas

• Futures positions are marked to market daily, with cash credited or debited as prices change.
• Gains and losses accumulate in the account while the position is open.
• Closing an offsetting position leaves the accumulated entry-to-exit price difference realized.
• A trader who has closed the position has no futures exposure through the contract’s later expiration.
• The explanation omits market-specific margin and transaction details.

Tags

# the cash flows behind closing out futures positions


# the cash flows behind closing out futures positions












I always get confused about the cashflows occurring when a futures position is closed out. For example, say it is January and I enter into a long December Futures position with a futures price F(jan). I want to close out my position in July, and the December futures price is F(july), so I short this futures contract.

So, as I understand it, in December, the long futures has a payoff of S(Dec) - F(jan), and the short position has a payoff of F(july) - S(Dec), where S(Dec) denotes the value of the underlying asset in december.

So the total payoff in F(july) - F(jan), and this payoff happens in december, not when i close my position out in july. However, it seems that in Hull, this payoff is immediate, is there something I'm missing?

## Answer by Alex C (score 6, accepted)

https://quant.stackexchange.com/a/20990

Futures contracts are marked to market every day. This mean that each evening cash is added to or subtracted from your account as a result of the price movement that day. When you close out your position in July these daily cash movements cease, and you are left with F(july) - F(jan) which has gradually accumulated in your account. Nothing at all happens from July to December, since you are out of the future during that time.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.