A futures contract is traded just like a stock or an option contract. So how come a futures contract has the concept of mark to market whereas a stock or an option does not have this concept? IS it because in a futures contract, payment is only upon settlement/delivery (a.k.a in the future) whereas in stock and option, we have to pay upfront?
asked May 14, 2014 at 18:44
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Specifically, are you talking about year end MTM for tax purposes?– JTP - Apologise to Monica ♦Commented May 14, 2014 at 23:22
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1To echo JoeTaxpayer, what do you mean by "concept of mark-to-market"? The concept exists for any financial instrument. Whether someone (other than you) cares about your MTM value is what varies depending on the type of instrument traded.– dg99Commented May 15, 2014 at 21:59
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I am asking about the MTM that happens at the end of each day in a futures contract– Victor123Commented May 16, 2014 at 18:54
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1 Answer
All margin is marked to market.
Option longs do not post margin because long margin trading is forbidden.
Equity longs must post margin if cash is borrowed to fund the purchase.
Shorts of all kinds must post margin, and the rates are generally the same: a few standard deviations away from the mean daily change of the underlying.
A currency futures trader, because of the involatility of most major monies, can get away with a few percentage points. Commodities can get to around 10%. Single equities are frequently around 20%, while indices can get back down to 10%.
A future is a special case because both sides are technically short and long at the same time. The easiest example to perceive is a currency future. Which one is the buyer and which is the seller? Both and neither.
Contracts may be denominated for one side as the seller and the other the buyer, but contractually, legally, and effectively, both are liable to the other, and both must take delivery. For non-currency assets, it only appears as if the cash seller is the buyer because cash is not considered an asset in the same way all other assets are, but the "long" is obligated to sell cash and buy the "asset".