Page 178 - DCOM510_FINANCIAL_DERIVATIVES

Unit 11: Clearing and Settlement

Notes
Table 11.6: Composition of MTM at the End of the Day
The margin charged on the brought forward contract is the difference between the previous day’s
settlement price of ` 100 and today’s settlement price of ` 105. Hence on account of the position
brought forward, the MTM shows a profit of ` 500. For contracts executed during the day, the
difference between the buy price and the sell price determines the MTM. In this example, 200 units
are bought @ ` 100 and 100 units sold ® ` 102 during the day. Hence the MTM for the position
closed during the day shows a profit of ` 200. Finally, the open position of contracts traded during
the day, is margined at the day’s settlement price and the profit of ` 500 credited to the MTM
account. So the MTM account shows a profit of ` 1200.
Trade details Quantity bought/sold Settlement price MTM
Brought forward
from previous day 100@100 105 500
Traded during day
Bought 200@100 102 200
Sold 100@102 105 500
Open position (not squared up)
Total 1200

The CMs who have a loss are required to pay the mark-to-market (MTM) loss amount in cash
which is in-turn passed on to the CMs who have made a MTM profit. This is known as daily
mark-to-market settlement. CMs are responsible to collect and settle the daily MTM profits/
losses incurred by the TMs and their clients clearing and settling through them. Similarly, TMs
are responsible to collect/pay losses/profits from/to their clients by the next day. The pay-in
and pay-out of the mark-to-market settlement are affected on the day following the trade day.

Notes In case a futures contract is not traded on a day, or not traded during the last half
hour, a ‘theoretical settlement price’ is computed as per the following formula:

F = Se rT
Where:
F =Theoretical futures price

S = Value of the underlying index
r = Cost of financing (using continuously compounded interest rate) or rate of interest
(MIBOR)

T = Time till expiration
e =2.71828
After completion of daily settlement computation, all the open positions are reset to the daily
settlement price. Such positions become the open positions for the next day.

Task What is the outstanding position on which initial margin will be calculated if Mr.
Madanlal buys 800 which @ 1060 and sells 400 units @1055.

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