Chapter 2 of 8

Mark-to-market and daily cash flows

Understand why a futures position can require cash before expiry even if the eventual price returns to the entry level.

3 min read · Original educational chapter

In this chapter

Daily settlement realizes a cash-flow path
Reconcile rather than double-count
Stress cash as well as price
Decision lab: A final profit does not fund an earlier debit
Worked example
Common mistakes
Check your understanding

Daily settlement realizes a cash-flow path #

Futures are marked against settlement prices under the relevant clearing rules. A daily change creates a payable or receivable cash flow, and the reference for the next interval resets. This is separate from the initial margin that supports an open position.

A cumulative economic result and a cash funding requirement are different questions. A position can eventually recover while requiring substantial cash during an earlier adverse interval. A participant unable to meet obligations may not remain in the position long enough for that recovery.

Reconcile rather than double-count #

For a simple unchanged position, summing the daily settlement differences leads to the overall entry-to-exit price change, before costs and adjustments. Do not add both the cumulative marked P&L and an additional full entry-to-exit P&L as if they were separate gains.

New positions, partial exits and contract changes complicate the ledger. Use execution records and the broker’s actual statement. Intraday risk checks and collection timelines can differ from an educational end-of-day table.

Stress cash as well as price #

A useful scenario asks how large the most adverse cumulative cash outflow could become before the intended end date. Combine that with possible margin increases and reduced collateral values. Assuming the first day’s margin remains constant can understate funding pressure.

The official settlement methodology and calendar are contract-specific and can change. Avoid relying on a remembered settlement-price formula around expiry; consult the current exchange calendar and circulars.

Decision lab: A final profit does not fund an earlier debit #

A hedged business may expect cash from a physical sale later while the futures leg demands cash earlier. Positive combined terminal economics do not prove the path is fundable. A bank balance at expiry is not available on every earlier settlement date.

Write a day-by-day cash ledger with opening cash, settlement debit or credit, available transfer and closing cash. Include one failed transfer and an adverse gap. Identify the earliest funding failure even in a scenario that eventually produces a combined gain.

Hypothetical worked example

Flat overall, but not free to hold

A fictional long future enters at 100 with 100 quotation units. Settlement at 95 produces −₹500. The next settlement at 97 produces +₹200. Closing at 100 adds +₹300. The three changes sum to zero before costs.

The first adverse move nevertheless requires ₹500 of cash under the illustration. An inability to fund it can lead to a close before the recovery. A zero endpoint result therefore does not mean there was no funding risk.

Transaction costs make the final economic result negative even in this flat-price example. The exact settlement timing and permitted credits are governed by current clearing and broker arrangements.

Common mistakes

Counting daily settlement gains and full-period P&L twice.
Assuming a favorable eventual price removes interim funding needs.

Check your understanding

Can a future finish near entry yet require cash along the way?

Make this chapter useful

Can you defend the reasoning?

Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.

Sources and further reading

Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.

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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.