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NISM-Series-VIII: Equity Derivatives · Accounting and Taxation

Accounting for Futures and Options Transactions

Updated 11 October 2026

Accounting for futures and options records margins, daily mark-to-market (MTM) gains or losses, option premiums and final settlement. Initial margin is a deposit and stays an asset. MTM margin is a daily profit or loss, booked in the books. Premium is paid or received on option contracts. Match each flow to its entry.

Understand Accounting for Futures and Options Transactions

Start with one idea: a derivative trade creates cash movements of different kinds. Each kind has a different accounting nature. Your job in the exam is to name the nature correctly.

Initial margin is a deposit paid by the client to the trading member when you take a futures position. The member in turn deposits margin with the clearing member or clearing corporation. It is not a cost or a loss. It is returned when the position closes. So in the client's books it is an asset, usually shown as a deposit or margin receivable. It is not charged to the profit and loss account.

Mark-to-market (MTM) margin is the daily settlement of gains and losses on open futures positions. The exchange compares the day's settlement price with the previous reference price. A loss is paid out and a gain is received in cash. The amounts paid or received are kept in an MTM margin account (mark-to-market margin - equity index/stock futures account). At the reporting date, a net debit balance on open positions is provided for as a loss. A net credit balance is ordinarily not recognised as profit until settlement. This follows the prudence principle. The exam usually tests the simple idea: MTM is a gain or loss settled in cash, not a deposit.

Option premium is the price of the option. The buyer pays it and the seller receives it. It is paid at once, in full, and does not come back. Both sides record it in an option premium account (equity index/stock option premium account). The buyer debits it and the seller credits it. At the balance sheet date, prudence applies. A debit balance, for example the buyer's when the premium has fallen below what was paid, is provided for as a loss. A credit balance is not recognised as profit until the position is closed or expires. When the option is closed, expires or is settled, the difference goes to profit and loss.

Settlement closes the cycle. On expiry or square-off, the final MTM or premium difference is booked as profit or loss. The related margin deposit is released back. Index derivatives on Indian exchanges are cash-settled, so no shares move for them. Stock derivatives on Indian exchanges are physically settled (delivery-based), so shares are delivered if the position is held to expiry. A position closed before expiry ends in cash differences only. Keep the cash flows and the deposit flows in separate columns in your mind.

Key formulas to remember

Initial margin
Initial margin paid = Asset (deposit); not an expense
Entry: Dr Margin account, Cr Bank. Returned on closing, so no profit or loss effect.
Futures MTM
MTM per unit = Settlement price − Previous reference price (long); the sign reverses for short
Total MTM = per-unit difference × quantity. A loss is paid, a gain is received. The amounts go through the MTM margin account.
Futures final settlement
Final profit or loss = Σ of daily MTM amounts
Equals (closing price − entry price) × quantity for a long position, ignoring charges.
Option premium amount
Premium paid or received = Premium per unit × lot size × number of lots
Buyer: Dr Option premium account, Cr Bank. Seller: Dr Bank, Cr Option premium account. Not refundable.
Option result on closing
Buyer: Profit or loss = Closing receipt − Premium paid; Seller: Profit or loss = Premium received − Closing payment
Booked to profit and loss on square-off, expiry or exercise.

How to solve Accounting for Futures and Options Transactions questions

Use this method for any accounting question on futures and options in the NISM Equity Derivatives paper.

  1. 1Identify the instrument: futures or option, and whether the client is long, short, buyer or seller.
  2. 2Identify the cash flow: initial margin, MTM, premium or final settlement.
  3. 3Classify it: deposit (asset), daily gain or loss, premium, or closing profit or loss.
  4. 4Compute the amount using price difference × quantity, or premium × lot size × lots. Check the sign for long versus short.
  5. 5Write the entry with named accounts. Margin paid: Dr Margin account, Cr Bank. Option buyer: Dr Option premium account, Cr Bank. Option seller: Dr Bank, Cr Option premium account.
  6. 6Check whether the item goes to the profit and loss account. Deposits never do. Closing results do. At the reporting date, a net debit balance in the MTM margin or option premium account is provided for as a loss, and a net credit balance is not recognised until settlement.
  7. 7Match your result with the four options and eliminate those that call margin an expense or premium refundable.

Quickest way: Three-label shortcut

When to use it: Use when a question asks what a payment is, or how it is treated, and you have under a minute.

  1. Label the payment: Margin, MTM or Premium.
  2. Margin means asset, returnable, no profit or loss impact.
  3. MTM means gain or loss, settled daily in cash.
  4. Premium means paid by buyer, received by seller, not returned.
  5. Pick the option that fits the label and drop any that mix them.

Common mistakes in Accounting for Futures and Options Transactions

  • Treating initial margin as an expense

    It is money leaving your account, so it feels like a cost.

    Fix: Remember it is a refundable deposit. Margin deposits never affect profit and loss. MTM gains and losses and the final result on closing or expiry do.

  • Treating MTM margin as a deposit

    Both are called margin.

    Fix: MTM is a settled daily profit or loss. A deposit is held and returned; MTM is paid or received.

  • Reversing the sign for a short futures position

    Students compute the long position and forget the short side.

    Fix: A short position gains when the price falls. Write the direction before computing.

  • Forgetting lot size when computing amounts

    Questions quote price per unit.

    Fix: Multiply by lot size and number of lots every time.

  • Thinking the option seller pays premium

    Confusing the seller with the buyer.

    Fix: The buyer always pays the premium. The seller receives it and takes on the obligation.

  • Assuming margin is refunded only for profitable trades

    Mixing deposit with result.

    Fix: Margin is released on closing whatever the result. The profit or loss is settled separately.

Worked examples

Example 1

A client buys 2 lots of an index futures contract, lot size 50, at 20,000. Settlement price on day 1 is 20,040. On day 2 it is 19,990. What is the MTM on each day, and the total result after day 2?

Show the solution
  1. Quantity = 2 × 50 = 100 units.
  2. Day 1 MTM = (20,040 − 20,000) × 100 = 40 × 100 = ₹4,000 gain.
  3. Day 2 MTM = (19,990 − 20,040) × 100 = −50 × 100 = ₹5,000 loss.
  4. Total = 4,000 − 5,000 = −₹1,000.
  5. Check: (19,990 − 20,000) × 100 = −₹1,000. Matches.

Answer: Day 1 gain ₹4,000, day 2 loss ₹5,000, net loss ₹1,000.

Example 2

A client buys 1 lot (lot size 75) of a call option at a premium of ₹120 per unit and later sells it at ₹150 per unit. What is the premium paid and the profit booked?

Show the solution
  1. Premium paid = 120 × 75 = ₹9,000, shown as an asset until the position ends.
  2. Amount received on closing = 150 × 75 = ₹11,250.
  3. Profit = 11,250 − 9,000 = ₹2,250.
  4. Book ₹2,250 as profit and loss, and clear the premium asset.

Answer: Premium paid ₹9,000; profit on closing ₹2,250.

Exam tips

  • Read the first line of each question to see whether it asks about margin, MTM or premium.
  • If an option says margin is an expense, treat it as the trap and reject it.
  • Always multiply by lot size and lots; the option with the per-unit figure is a trap.
  • Check long versus short before choosing the sign of MTM.
  • Negative marking is 25% of the question marks, so skip an item only if you cannot narrow it to two.

Practice questions from Accounting and Taxation

Accounting for Futures and Options Transactions: frequently asked questions

Is initial margin an expense in the client's books?

No. It is a refundable deposit and stays as an asset. It is returned when the position closes.

What is the difference between initial margin and MTM margin accounting?

Initial margin is a deposit held against risk and carries no profit or loss. MTM margin is the daily gain or loss on open futures, settled in cash and treated as profit or loss.

How is option premium treated in the books of the buyer?

The buyer pays the premium in full and records it as an asset until the option is squared off, exercised or expires. The difference then goes to profit and loss.

Are futures and options settled in cash or by delivery?

Index derivatives are cash-settled, so only cash differences are paid or received and no shares are delivered. Stock derivatives are physically settled, so shares are delivered on settlement if the position is held to expiry.