Question

1. Briefly describe how the marked-to-market process works with future contracts. Feel free to illustrate with an original example (2 points)
2. Suppose that a futures contract is drawn up in January for the delivery of 1000 troy ounces of gold in July at $1,500/troy ounce. The current spot price of gold is $1,400/troy ounce. What is the value of this futures contract to the seller? What, if anything, do you expect to happen between buyer and seller of the futures contract when it is drawn up? (3 points)
3. Now suppose that the price of gold for delivery in July increases to $1,800 in, say, April. Who gains and who loses? By how much? Be specific in your answer (1 point)
4. Your friend Frank tells you one day, “I bought a futures in silver back in March for $1000. The next day the price fell to $800 and stayed there. I held onto it and the day before delivery it shot back up to $1000, can you believe it? I broke even on that investment!” Did Frank break even, or is there something that Frank forgot to take account of? Explain. (2 points)

Answer 1

Ans Q1:

MTM or Mark to Market is a way of measuring the fair value of of profit or loss of the future contract that can fluctuate over time and final value can come after closing the open position. Mark to market provides a current situation of profit or loss of a contract based on live market conditions for long or short contracts.

It is basically a tool to check profit or loss in the live market.

Let’s take an example to understand (MTM);

- Buy a future contract this morning at price suppose x0

- At the end of the day new price will be suppose x1

The change in future contract will be = (x0-x1)*No. of Future Cotracts units=MTM

Above is the best illustration for MTM.