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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) process?

Daily mark-to-market settles futures profits and losses every day by crediting gainers and debiting losers. This prevents large unsettled losses from building up and lowers the risk that a counterparty defaults, which is why the clearing corporation uses it.

  1. ATo settle accumulated profits and losses every day so that counterparty default risk does not build upCorrect
  2. BTo fix the final settlement price of the contract at the time of purchase
  3. CTo let the investor skip paying any margin on the contract
  4. DTo convert the futures contract into a forward contract at expiry

Explanation

Daily MTM credits gains and debits losses to the margin accounts of both parties at the end of each day. This stops large unrealised losses from accumulating and so reduces default risk. It does not remove margin requirements, and the settlement price is not fixed at purchase.

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