Margin and Mark-to-Market

My position is quietly being reckoned every single day, whether I check on it or not.

• Explain how a futures position's gains and losses are calculated and settled in cash every day, rather than only when the position is closed.
• Describe how the initial margin deposited acts as a live buffer that absorbs daily gains and losses, not a static fee.
• Calculate a day's mark-to-market gain or loss using the previous day's settlement price as the reference point, not the original entry price.
• Identify why an unrealized loss on an open futures position still represents a real, same-day change to the margin account.

You already saw it: the trader's account changed overnight, even though nothing was sold. That's not a glitch — it's how every futures position works. Here's the plain rule: a futures position is financially reckoned every single day, not just when you close it.

This daily reckoning has a name — mark-to-market (MTM). Every day, the exchange takes the day's settlement price, compares it to the previous day's settlement price, multiplies the difference by the lot size, and either credits or debits that amount to your account. That's it. No waiting for the story to end.

Where does that money come from or go into? Your margin balance. When you opened the position, you deposited an initial margin — think of it not as a fee you paid to enter, but as a buffer you set aside to absorb daily shocks. Price moves in your favor, the buffer grows. Price moves against you, the buffer shrinks. It's a live account, not a locked box.

Once the account is reckoned daily, the only sensible response is to watch it daily too.

One detail matters more than it seems: each day's gain or loss is measured against yesterday's settlement price, not your original entry price. The reference point resets every single day. So Day 2's loss isn't measured from where you bought — it's measured from where Day 1 ended.

Once you see the account is reckoned daily, the only sensible response is to watch it daily too — not wait for the ending.

Put together, this is why an "unrealized" loss on a futures position isn't harmless — it's already moved real rupees out of your margin account today, whether or not you were watching.

Suppose a trader buys one futures lot at ₹1,000 per unit, with a lot size of 100 units — so the contract value is ₹1,00,000. To open this position, they deposit an initial margin of ₹15,000 (about 15% of contract value, used here as a simplified, illustrative rate).

Day 1: the futures settlement price rises to ₹1,010. The mark-to-market gain is calculated as (₹1,010 − ₹1,000) × 100 units = ₹1,000. That ₹1,000 is credited to the trader's account the same day — their margin balance moves from ₹15,000 to ₹16,000, without them selling anything.

Day 2: the price falls to ₹985. Now the loss is measured from the new reference price — Day 1's settlement price of ₹1,010, not the original ₹1,000. So the mark-to-market loss is (₹985 − ₹1,010) × 100 = −₹2,500. That amount is debited from the account the same day, bringing the balance down to ₹13,500.

Across the two days, the trader's account shows a net change of ₹1,000 − ₹2,500 = −₹1,500 against their original ₹15,000 margin — even though they never closed the position. Nothing about this trade has "ended." But their account already carries the story of both days, because mark-to-market settles daily, not just once at the finish.

Point: Gains and losses are settled daily against the previous day's settlement price, and margin absorbs each day's swing in real time — the position doesn't wait for closure to affect the account.

One thing worth slowing down on: the reference price resets every day. It's tempting to think a "loss" should be measured against what you originally paid — ₹1,000 in our example. But mark-to-market doesn't work that way. On Day 2, the loss is calculated from Day 1's settlement price (₹1,010), not the original ₹1,000. That's why a price of ₹985 on Day 2 — which is actually still below the original ₹1,000 entry too — produces a loss measured as (₹985 − ₹1,010), not (₹985 − ₹1,000). Each day starts a fresh comparison from wherever the previous day left off.

This unit stops here deliberately. It doesn't cover what happens if the margin buffer runs too low — how brokers issue a margin call asking you to top up, or what happens if you don't. That mechanism, and how exchanges actually calculate margin percentages, belongs to a later unit. For now, the one thing to hold onto is simpler: the account moves daily, and the reference price moves with it.

• Believing a futures position only affects your money when you finally close (square off) the trade. — With everyday holdings like a stock you're keeping or a fixed deposit, the 'result' only feels real when you sell or withdraw — learners carry that same mental model into futures. Fix: Remember futures settle daily through mark-to-market: the account balance changes every day the position is open, whether you check it or not.
• Treating the initial margin as a one-time fee that sits untouched until the trade ends. — The word 'deposit' and the upfront payment feel like a booking fee or security deposit — something static. Fix: See margin as a working buffer, actively debited and credited each day by mark-to-market gains and losses; its balance can rise or fall daily.
• Measuring a day's loss against the original entry price instead of the previous day's settlement price. — It feels natural to compare today's price to what you originally paid, since that seems like the 'real' cost. Fix: Always use yesterday's settlement price as today's reference — the comparison point resets every single day.

• A futures position is settled every single day through mark-to-market — not just when you close it.
• Margin is a live buffer, not a fee: it absorbs daily gains and losses, so its balance moves up and down.
• Each day's gain or loss is measured from the previous day's settlement price, not your original entry price.
• An unrealized loss still moves real money out of your margin account the same day it happens.
• Check your margin balance daily so daily changes never come as a surprise.

Q1. In futures trading, when is a position's gain or loss actually settled in cash?

• Only when the trader closes the position
• Every single day, through mark-to-market settlement
• Only at the end of the contract's expiry month
• Only if the trader requests a settlement Answer: Every single day, through mark-to-market settlement — Futures positions are settled daily through mark-to-market (MTM) — gains and losses move in and out of the margin account every day the position stays open, not just when it's closed.

Q2. True or False: The initial margin deposited to open a futures position stays untouched, like a fee, until the trade is closed. Answer: False — Margin is a live buffer, not a static fee. It's actively credited and debited each day as mark-to-market gains and losses occur, so its balance can rise or fall daily.

Q3. A trader's futures position shows an 'unrealized' loss because they haven't closed it yet. What does this actually mean for their margin account that same day?

• Nothing changes in the account until the position is closed
• The loss is only recorded on paper and has no effect on cash until exit
• The loss is already debited from the margin account in cash that same day
• The loss is added to the original entry price for future reference Answer: The loss is already debited from the margin account in cash that same day — 'Unrealized' does not mean 'not yet affecting the account.' Under mark-to-market, even a position that's still open has its daily loss debited in real cash from the margin balance the same day it occurs.

Q4. On Day 2, a futures price falls from the Day 1 settlement price to a new lower price. Which price should be used as the reference point to calculate Day 2's mark-to-market loss?

• The original entry price when the trader first bought the contract
• The Day 1 settlement price
• The average of the entry price and Day 1 price
• The lowest price reached at any point during Day 2 Answer: The Day 1 settlement price — Each day's mark-to-market gain or loss is measured from the previous day's settlement price, not the original entry price. The reference point resets daily, so Day 2's loss is calculated using Day 1's settlement price as the starting point.

Q5. A trader holds a futures position and, after a losing day, tells a friend: "I haven't sold, so I haven't actually lost anything yet." Is this true, since the position is still open? Reveal: Weak: yes, no loss is real until you sell. Strong: mark-to-market debits or credits the loss or gain to the margin account every single day based on the settlement price move — the loss is real and cash-settled daily whether or not the position is closed, not just a paper number waiting to become real.