Chapter 03 · Futures contracts
Marked to market each day
Mark-to-market means yesterday’s paper loss becomes today’s cash movement. Futures do this every settlement cycle so that losses do not pile up unseen until expiry. This chapter posts three days of a short futures trade into a ledger.
Why the system refuses to wait until expiry
If losses were settled only at expiry, a trader who was wrong by a large amount could owe more than they can pay, and the clearing corporation would be holding the bag. Daily settlement takes the loss while it is still the size of one day’s move. That protects the system. It also means you cannot mentally classify a loss as theoretical. If the settlement price went against you, the cash has left, even though you have not closed the contract.
Three days of a short
You sell one lot of 200 shares at a futures price of ₹500. Contract value ₹1,00,000. You are short: you gain if the futures price falls, and you lose if it rises. Assume, for the illustration only, that margin of ₹18,000 is blocked and that you keep another ₹18,000 spare in the account. Settlement prices: day 1, ₹508; day 2, ₹490; day 3, you buy the lot back at ₹496 and flatten.
| Day | What happened | Cash result | Position after |
|---|---|---|---|
| 1 | Settlement price 508, against the short by ₹8 | Loss 200 × 8 = ₹1,600, debited | Still short |
| 2 | Settlement price 490, in favour by ₹18 from 508 | Gain 200 × 18 = ₹3,600, credited | Still short |
| 3 | You buy at 496, so from 490 you give back ₹6 | Loss 200 × 6 = ₹1,200 on the close | Flat |
Add the cash: −1,600 + 3,600 − 1,200 = +₹800. You can check it another way. You sold at 500 and bought at 496, which is ₹4 in your favour, times 200 shares, which is ₹800. The daily debits and credits are the path. The entry and exit are the total. They match. If they do not match in your own ledger, you have missed a charge or a corporate adjustment, and the contract note is where you look.
The path can throw you out before the total would have saved you
Look at day 1 again. You were eventually right by ₹800, and on day 1 you were wrong by ₹1,600. If you had posted only the minimum and the next morning’s gap had been ₹20 against you instead of ₹8, the spare cash might not have covered the debit. The broker could have closed the short at the worst price of the sequence, and the later fall to ₹490 would have belonged to someone else. Mark-to-market does not care that your three-day story had a happy ending. It cares that each morning’s balance can pay that morning’s loss.
This is the practical meaning of ‘I was right, but the position was closed’. The sentence usually describes a path that exceeded the cash set aside, not a conspiracy. Size the position so a move you consider ordinary, not only the move you consider likely, fits inside the spare cash.
What to remember
- Each day’s settlement price turns the open futures loss or gain into cash.
- The sum of the daily marks equals the difference between your entry and your exit, before charges.
- A position that would have ended profitably can still be closed early if an intermediate debit exceeds the cash behind it.
- Keep a three-line ledger for a while. It is the fastest way to see charges you would otherwise call ‘slippage’.