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Strategic Financial Management · Forwards and Futures

Futures Contracts: Margin and Mark to Market Explained

Updated 11 October 2026 · Fact-checked

A futures contract is a standardised agreement, traded on an exchange, to buy or sell an asset at a fixed price on a future date. The clearing house guarantees it. Both sides post margin, and gains and losses are settled every day (mark-to-market). To solve questions, compute daily price change × quantity, then track the margin balance.

Understand Futures Contracts: Features and Mechanics

A futures contract is an agreement to buy or sell a specified asset at a price fixed today, with delivery or settlement on a set future date. It is traded on a recognised exchange. This is the key difference from a forward, which is a private deal between two parties.

Futures are standardised. The exchange fixes the underlying, the lot size (contract size), the expiry date, the tick size and the settlement method. You cannot negotiate these. Because every contract is identical, contracts can be traded easily and many buyers and sellers can meet in one market.

The clearing house (clearing corporation) sits between buyer and seller. After a trade, it becomes the buyer to every seller and the seller to every buyer. So you do not face the risk that the other party defaults. The clearing house protects itself with margins.

Initial margin is the deposit you pay when you open a position. It is a small part of the contract value, not the full price. Each day the position is marked to market: the exchange compares the day's settlement price with the previous one and credits profit or debits loss to your margin account. The long gains when the price rises, the short gains when it falls. Profit to one side is exactly the loss of the other.

Maintenance margin is the minimum balance you must keep. If the balance falls below it, you get a margin call and must top up, normally to the initial margin level, not just to the maintenance level. You can withdraw any balance above the initial margin. Most futures are closed out before expiry by taking an opposite position, so the actual asset seldom changes hands. Index futures in India are cash-settled.

Key rules to remember

Daily mark-to-market gain or loss (long)
Daily MTM = (Today's settlement price − Previous settlement price) × Lot size × Number of lots
For the first day, use the entry price as the previous price. A positive result is credit to a long position.
Daily mark-to-market gain or loss (short)
Daily MTM = (Previous settlement price − Today's settlement price) × Lot size × Number of lots
The sign is the reverse of the long position.
Contract value
Contract value = Futures price × Lot size
Initial margin is a percentage of this value, or an amount stated in the question.
Margin call rule
If margin balance < Maintenance margin, deposit = Initial margin − Current balance
Variation margin brings the account back to initial margin, unless the question says otherwise.
Total profit or loss on a position
Total P&L = Σ daily MTM = (Closing price − Entry price) × Quantity for a long
Use this to check your daily workings. For a short, reverse the sign.

How to solve Futures Contracts: Features and Mechanics questions

Use the same table approach for any margin and mark-to-market question.

  1. 1Note whether the position is long or short, the lot size, the number of lots, and the entry price.
  2. 2Compute the initial and maintenance margin amounts. Convert percentages into rupees using the contract value if needed.
  3. 3List the daily settlement prices in order, starting with the entry price as day 0.
  4. 4For each day, compute the price change and multiply by quantity. Apply the sign for long or short.
  5. 5Update the balance: opening balance + MTM + any margin deposit − any withdrawal = closing balance.
  6. 6Check whether the closing balance is below maintenance margin. If so, calculate the call as initial margin − balance and add it the same day or next day, as the question states.
  7. 7Check that the total of daily MTM equals (final price − entry price) × quantity, with the right sign.
  8. 8State the answer clearly: margin calls, final balance, net profit or loss, as asked.

Quickest way: Running balance table

When to use it: Use this when the question gives several daily prices and asks for margin calls or the ending balance.

  1. Compute quantity = lot size × lots once.
  2. Write the price changes in a row and multiply each by quantity.
  3. Start with the initial margin and add each day's MTM, one line per day.
  4. Mark any line where the balance drops below maintenance and write the top-up needed to restore initial margin.
  5. Verify with total P&L = (last price − entry price) × quantity.

Common mistakes in Futures Contracts: Features and Mechanics

  • Calculating profit only from entry price to final price and ignoring the daily balance.

    Students treat futures like a forward settled at maturity.

    Fix: Build the day-by-day table. Margin calls depend on the path of prices, not only the end price.

  • Topping up only to the maintenance margin level.

    The word 'maintenance' suggests that is the target.

    Fix: Unless the question says otherwise, the call restores the balance to the initial margin. Deposit = initial margin − current balance.

  • Using the wrong sign for a short position.

    Students copy the long formula for all positions.

    Fix: Write 'long: up is profit; short: down is profit' before you start and check the sign on every line.

  • Forgetting to multiply by the lot size or number of lots.

    The price change per unit looks like the answer.

    Fix: Find total quantity first and use it on every line.

  • Treating initial margin as the price paid for the contract or as a cost.

    Margin is confused with the premium in options.

    Fix: Margin is a refundable performance deposit. Futures have no upfront price. Only the daily MTM is gain or loss.

  • Margin call triggered when the balance equals maintenance margin.

    Students read the rule loosely.

    Fix: The call arises only when the balance falls below the maintenance margin.

Worked examples

Example 1

Ravi buys 2 lots of a Nifty-type index futures contract at 22,000. Lot size is 50. Initial margin is ₹1,10,000 in total and maintenance margin is ₹80,000. Settlement prices on three days are 21,900, 21,800 and 22,050. Find the daily MTM, any margin call, and the ending balance. Assume any call is paid the same day to restore initial margin.

Show the solution
  1. Quantity = 2 × 50 = 100 units. Long position.
  2. Day 1: (21,900 − 22,000) × 100 = −₹10,000. Balance = 1,10,000 − 10,000 = ₹1,00,000. Above ₹80,000, so no call.
  3. Day 2: (21,800 − 21,900) × 100 = −₹10,000. Balance = ₹90,000. No call.
  4. Day 3: (22,050 − 21,800) × 100 = +₹25,000. Balance = ₹1,15,000.
  5. Check: total MTM = −10,000 − 10,000 + 25,000 = ₹5,000. Also (22,050 − 22,000) × 100 = ₹5,000. Matches.

Answer: No margin call arises. Daily MTM is −₹10,000, −₹10,000 and +₹25,000. Ending balance is ₹1,15,000, a net profit of ₹5,000.

Example 2

Meera sells 1 lot of a stock futures contract at ₹500. Lot size is 1,000 shares. Initial margin is ₹50,000 and maintenance margin is ₹40,000. Settlement prices on the next three days are ₹508, ₹515 and ₹505. Find the margin calls and the balance at the end of day 3. Calls restore the account to initial margin on the same day.

Show the solution
  1. Quantity = 1,000. Short position, so MTM = (previous price − today's price) × 1,000.
  2. Day 1: (500 − 508) × 1,000 = −₹8,000. Balance = 50,000 − 8,000 = ₹42,000. Not below ₹40,000, so no call.
  3. Day 2: (508 − 515) × 1,000 = −₹7,000. Balance = 42,000 − 7,000 = ₹35,000. Below ₹40,000, so a call arises.
  4. Call = 50,000 − 35,000 = ₹15,000. Balance after deposit = ₹50,000.
  5. Day 3: (515 − 505) × 1,000 = +₹10,000. Balance = 50,000 + 10,000 = ₹60,000.
  6. Check: total MTM = −8,000 − 7,000 + 10,000 = −₹5,000. Also (500 − 505) × 1,000 = −₹5,000. Matches. Balance = 50,000 + 15,000 − 5,000 = ₹60,000.

Answer: One margin call of ₹15,000 arises on day 2. The balance at the end of day 3 is ₹60,000. Net loss on the position is ₹5,000.

Exam tips

  • In MCQs, test each statement on the clearing house, standardisation and margins against the definitions. Watch words like 'full price' or 'only at expiry', which signal a wrong option.
  • Always show the daily table. Even if the final answer is wrong, you keep marks for method.
  • Read whether the question says the call restores initial margin or maintenance margin, and follow it.
  • Do the total-P&L check at the end. It takes ten seconds and catches sign errors.
  • If a question compares futures with forwards, mention exchange trading, standardisation, clearing house guarantee and daily settlement.

Practice questions from Forwards and Futures

Futures Contracts: Features and Mechanics in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Futures Contracts: Features and Mechanics: frequently asked questions

What is the difference between initial margin and maintenance margin?

Initial margin is the deposit you pay when you open a futures position. Maintenance margin is the lower minimum balance you must keep. If your balance drops below it, you get a margin call to top up the account.

How does mark to market work in futures?

At the end of each day, the exchange compares the settlement price with the previous one. It credits the gain or debits the loss to each account. So profits and losses are paid daily, not at expiry.

How much do I deposit when a margin call is made?

Normally you deposit enough to bring the balance back to the initial margin. That is initial margin minus the current balance. Follow the question if it states a different rule.

Why is there no default risk in futures?

The clearing house stands between buyer and seller and guarantees performance. It collects margins and settles daily, so losses cannot build up unchecked. This keeps counterparty risk very small.