How Daily Mark-to-Market Works for Futures Contracts
Summary
The document explains daily settlement for a futures position and clarifies the difference between the contract’s changing market price and the price originally agreed when entering the trade. Rather than comparing the futures price with the underlying asset price, the account is adjusted using the change in the futures price from the previous day. Gains and losses are credited or debited to the trader’s margin balance.
The answer describes mark-to-market as daily bookkeeping and explains that losses can reduce available margin enough to trigger a margin call when the broker’s maintenance requirement is breached. It gives no worked numerical example or contract-specific calculation. Margin thresholds vary by broker, and the percentages mentioned are presented as minimums in the answer rather than universal rules; actual requirements depend on the broker and contract. The explanation is a basic overview and does not discuss contract multipliers, settlement conventions, or how futures prices relate to spot prices over time.
Key ideas
- Daily futures profit and loss is generally based on the change in the futures price since the prior settlement.
- The futures price fluctuates over time; it is not fixed at the trade’s original price.
- Daily settlement credits gains to margin and debits losses from it.
- A margin call may occur when losses cause the account to fall below its maintenance requirement.
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# Understanding daily installment in futures
# Understanding daily installment in futures
Question: Is my understanding of how futures contract works correct?
Just trying to understand the basics of futures contract and its daily installments.
Consider a discrete time model where $t=0,1,2,...$. The agreed-on price is futures price and denote this as $F_t$. Denote the underlying asset's price over time as $P_t$.
The way daily installments works is:
At the end of the trading day, it is marked-to-market, so we evaluate $F_t-P_t$.
If $F_t-P_t>0,$ this amount is deposited to my margin account. If $F_t-P_t<0,$ this amount is subtracted from my margin account. If I face a streak of losses, then there would be a marginal call unless I replenish my margin account enough to cover further losses.
Is this correct?
What I am mainly confused is that the contract price, the price both parties of futures contract agree, is fixed, right? But the futures contract price changes over time? I don't understand what is "mark-to-market" on a daily basis. Is it the agreed price or the futures price?
## Answer by Chris (score 2, accepted)
https://quant.stackexchange.com/a/49569
MTM is really just bookkeeping. You hold some initial margin for your book with a broker and each day your account value is updated per end of day futures values as $F_t - F_{t-1}$ for each position. The contract price, $F_t$, isn't fixed, it fluctuates daily and is what MTM is based on.
When margin requirements are breached (as a result of losses in your positions), you get a margin call where you need to deposit additional funds to meet the maintenance margin requirement on your account. These levels vary by broker, but are at minimum 50% for initial margin and 25% for maintenance margin.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.