5.12 Mark to Market

WHAT IS MARK TO MARKING AFTER ALL?

Lets see an example.

* Above table reflect the prices for Nifty futures

 * Lot size for NIFTY future = 50

 Mr. Ramesh buys Nifty future at the rate 5000 .

We can see from the table above, Mr. Ramesh bought Nifty future @ 5000 and the same day Nifty futures closing price was 5010. Assuming that Mr Ramesh has not sold (squared off) his open position (buy Nifty future 1 lot), there is an unrealised gain of 10 points in Nifty futures open position for Mr Ramesh. This 10 points gain in Nifty futures translates into Rs.500 (10 pts X 50) unrealised gains. We say unrealised because the position is open and not yet closed. Nevertheless as per mark to market margin requirement the unrealised gains will be credited into the trading account of Mr Ramesh. The difference is always credited or debited on daily basis. Taking some example to next day, we can see that Nifty closed @ 5020. That means there is a gain of 20 pts from the purchase level which was at 5000. But since the mark to market (MTM) margin happens on daily basis another Rs.500 {(5020-5010) X 50} will be added to the trading account of Mr Ramesh. Thus on day 2 the total MTM will be Rs 500 + Rs 500 i.e Rs 1000/-. On day 3 the Nifty futures manages to close @ 5050 and hence the amount that needs to be credited to the trading account is equal to {(5050 - 5020) X 50} = Rs 1500. Thus on day three the total MTM gains would be Rs 2500.

On day 4 Nifty futures trades lower and comes down by 20 points and manages to close @ 5030. Here the MTM gains will shrink by 20 pts. That is {(5050 - 5030) X 50} = Rs 1000. Therefore the total MTM gains will be 1500 for the Nifty future bought by Mr Ramesh at Rs 5000 as it closed @ 5030 at the end of day 4.