Suppose you purchase a silver futures contract with a price of $17.82 per ounce and the exchange date is in the next week. The price of silver closes at $17.75 on the day that you enter the futures contract. The spot price of silver then rises to $17.80 the next day. If the futures contract is marking to market on a daily basis as the price changes, what is your cash flow at the end of the next business day?
Answer : Mark to Market is method to measure the underlying security at fair value. And loss/gain is recognised on regular basis. There is no cashflow occur in this marking. Cashflow occur only at the time of settlement.
In the question given above,
Loss recognized at the end of day of purchase = (17.82 - 17.75 ) ==> 0.07
Profit recognized on next day = (17.80 - 17.75) ==> 0.05
There will be no cashflows, cashflow only occur on day of settlement (i.e. on next week)
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