TREASURY CLASSROOM VOLUME 112

MARK TO MARKET SETTLEMENT IN FUTURE CONTRACT

Suppose there is a trading member XYZ now he buys 10 lots of USD/INR. In the one lot he is allowed to trade for 1000 USD so in 10 lots it is 10000 USD and now suppose the margin in each lot is around Rs 2000 so the total margin he needs to keep with the broker is Rs 20000. Now he had bought 10 lots of USD/INR at suppose Rs 73 now suppose the settlement price at the end of day 1 was around 72.80 than in that case there is mark to market of 0.20 paise*10000= Rs 2000. Now Rs 2000 trader has to give to the Broker as a mark to market. Now suppose on the other hand if the settlement price at the end of day 1 was 73.20 than in that case Rs 2000 gain as a mark to market broker has to give to the Trader.

Now in this case for the positions bought forward profit and loss is computed by multiplying the no of units with the contract size and than the difference between the previous day settlement price and current day settlement price now suppose the second day settlement is around 72.50.

Now in this case if the trader is taking forward the sell position of 10 lots and also he is taking it forward next day so on the day 1 it was valued at around 72.80 and second day settlement price is around 72.50 than in that case making a loss of around 30 paise per USD

Although there are many situations in which exporter and importer tends to enter into future markets on exchange as compared to the forward OTC markets as majorly the price transparency is there. But one needs to consider the mark to market on a daily basis.

Although if there is a difference between the currency forward and currency future than in that case it is for the arbitrageurs to make the profit out of it suppose for example 6 months currency future for USD/INR is trading at around 70.80/70.84 and also the 6 months currency forward is around 70.50/70.54 than in that case one can sell in future at a rate of around 70.80 and buy in forward 70.54 so the trader could capture the mispricing. Now suppose on the settlement the price is same in future and forward market that is 70 than in future contract there would be gain of around 80 paise and in forward the loss of around 54 paise so total net gain stands out be 34 paise that is the profit of arbitrageur.

Now there are other terms also like intra currency pair spread as it is also known as calendar spread now in this there is one long future contract and one short future contracts but both of them are having the different maturities but same underlying . And in case of inter currency pair long and short position in future but that is on different underlying and same maturity.

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