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Suppose I enter into a long futures contract to buy 1 ounce of gold at 1200$/ounce for delivery in May 2015. Between now and May 2015, the market price for a similar contract will certainly vary.

Do I need to worry about these fluctuations? Since I have already locked in a price of 1200$/oz, should I care if the market price goes up to 2000$/oz?

I ask because there is this concept of mark-to-market, where a contract's value is recomputed every day, but what does this mean for me when I have already locked in the price? Whatever happens I need to pay 1200$, so do I have to worry about repeatedly marking the contract to market price?

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Mark to market is important because although you have locked the prize for May 2015, you have a contract (the future) with some value that you can buy or sell before that date.

For example: imagine you wait until the expiration of the contract, and the price of gold has gone down to $1000/ounce. You still have the obligation to buy the gold at $1200/ounce, which means that your contract mark to market is $-200. So if you want to get rid of the contract, you have to actually pay $200.

The same happens before expiry. In general the mark to market of the future contract depends mainly on the difference of the price of gold at each time versus the strike of your future (i.e. the price agreed at expiry). But there are other factors that influence the mark to market, like for example the rate that you can borrow money, the cost of storing gold, the expected prize of gold in May 2015, etc.

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I think the current answer misses 2 important aspect of MTM. (1) It's part of the margin process. i.e. one must maintain a certain level of value in the account to keep the position open. The lost $200 (x the number of ounces) isn't paid on expiration, it must be replaced to keep the account value from going negative or below margin minimums. (2) for tax purposes, some countries require these trades to be marked to market at year end and taxed accordingly even if they remain open.

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  • Got it. Forgot everything about tax!
    – Victor123
    Feb 3, 2015 at 15:04
  • It also greatly reduces counterparty default risk as settlement is essentially daily. If someone can't pay the exchange or clearing house only has to stump up for one day's movement to close the contract out.
    – TheMathemagician
    Jun 7, 2018 at 16:49

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