Series VIIIMediumTrading, Clearing and Settlement

In the futures market, daily mark-to-market (MTM) settlement means:

AProfits and losses are settled only on the expiry date
BThe contract is physically delivered every day
CThe margin is returned to the client every day
DGains and losses are computed and settled in cash each trading day based on the day's closing pricecheck_circle

Correct answer

D. Gains and losses are computed and settled in cash each trading day based on the day's closing price

lightbulbDetailed Solution

Under daily MTM, each open futures position is revalued at the day's settlement price; the resulting gain or loss is credited or debited to the clearing member's account the same or next day. This daily settlement limits the build-up of counterparty risk.

Reference: NISM Series VIII Equity Derivatives, Chapter 4.

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