Mark to Market (Daily settlement of profit and loss)

Mark to Market is a financial term referring to the daily profit and loss settlement as a way of accounting for profit and loss in an investment portfolio transaction consisting of financial assets, valuing the accounting record of all open positions based on current market prices.

These new prices are what will determine the new guarantees that the investor will have to put in his portfolio and will mitigate an erroneous control of the positions of clients of financial institutions.

This model is very useful for entities to present their accounting about their earnings statements. At the same time, it is a model that many institutions use since they allow to measure the financial risks in real time and the leverage positions of their clients or margin calls and allow actions to be taken so that clients comply with their obligations to cover market guarantees.

This valuation is highly taken into account especially in products such as financial derivatives or credit buying and selling, but also in the accounting of a company where assets are recorded on the books at their real price or book value.

Mark to market example

We must take into account that a financial institution has to settle the positions of its assets with the client and with the market.

  • The settlement of the positions with the client is done in real time, in such a way that the client will be able to see the profit or loss of his portfolio in real time as well as his settlement in the event that he closes his live positions.
  • Settlement with the market is usually done through the scoring position of the financial institution with the clearing houses as well as with the depositary entities and is usually carried out in D+1. The procedure is performed through global balance movements of all clients, where you can see the total guarantees to be provided and then the entity adjusts the guarantees to each client correctly based on the assets it trades. In turn, the titles of each security that the entity has with its custodian are reconciled to verify that the delivery of the securities matches the transactions of the clients.

Let’s see a very simple example of a real-time trade and its profit and loss settlement:

John buys a Eurostoxx50 Future at a price of 3,000 points and decides to sell it after two hours at a price of 3,020 points. To do this, this trader deposits a guarantee of 8,000 euros, having 10,000 euros in his account and pays 2.50 euros per trade:

The transaction settlement is as follows in the movements of the cash account:

  • Refund of the trade collateral of 8,000 euros C (Credit)
  • Total trading commision of 5 euros D (Debit)
  • Profit from the transaction is 200 euros C (Credit)
  • Total balance of 10,195 euros C (Credit)

We must bear in mind that the contract multiplier of the index is 10 euros. Therefore, as John has gained 20 points in the trade, we have that the profit is 200 euros. We say that the multiplier is 10 euros because the Futures contracts have standard contractual conditions and, in this case in question, the multiplier of the Eurostoxx50 futures is 10 euros, the benefit formula in this example is the following:

Total profit = Trading profit in points * Multiplier = 20 points * 10 = 200 euros


 

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