NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
In an exchange-traded equity futures contract, which of the following is the main purpose of the daily mark-to-market (MTM) settlement?
Daily mark-to-market settles futures profits and losses every day through the clearing corporation. This stops losses from accumulating unpaid until expiry and thereby reduces counterparty default risk. It is a risk-management mechanism, not a brokerage collection or a way to defer losses.
- ATo collect brokerage from the client every day
- BTo transfer daily profits and losses so that losses do not accumulate unpaidCorrect
- CTo fix the final settlement price of the contract on the first day
- DTo give the buyer the right to skip losses until expiry
Explanation
Futures positions are marked to the daily settlement price and the gains or losses are settled each day through the clearing corporation. This prevents large unpaid losses from building up and so reduces default risk. It has nothing to do with brokerage or with giving any party a right to defer losses.
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