A method of accounting called mark to market (MTM) is used in the stock market to value your open futures trade positions based on their current market price. This method replaces the previous cost or entry price with the current market price or value to determine the worth of your open trade position.
Mark to market is used for derivatives like futures contracts, options, and swaps, where the contract’s value fluctuates based on the price of the underlying asset. Daily mark-to-market transactions are conducted, with the resulting gain or loss being recorded in the trader’s account.
Under the mark-to-market settlement method (which is followed for futures contract positions in India), any gains in the trader’s open position are added (credited) to their ledger, and losses are deducted (deducted) from the trader’s available trading funds at the end of each day.
For example, if a trader holds a futures contract trade position and the price of the underlying asset goes up, the value of the futures contract will also increase. In this case, the trader’s account will be credited with the gain resulting from the increase in value of the underlying asset, and vice versa if the price goes down.
Mark to market is an important accounting principle that allows investors to have a better understanding of the true value of their assets and liabilities. It also ensures that financial statements reflect current market conditions, making them more accurate and useful for decision-making.