What does daily settlement (mark-to-market) mean in futures contracts?

What does daily settlement (mark-to-market) mean in futures contracts?

• A. Gains and losses are settled daily.
• B. Settlement occurs only at maturity.
• C. Settlement is optional.
• D. Settlement happens monthly.

Answer: (A)

Daily settlement means that gains and losses from price changes in futures contracts are settled every trading day. Each day the contract is marked to the new settlement price, and the change in value is credited or debited to the trader’s margin account as variation margin. If the market moves in your favor, your margin account is funded; if it moves against you, you must provide additional funds to cover the loss. This process is handled by the clearinghouse to reduce counterparty risk and keep each party properly margined. While daily marking occurs throughout the contract’s life, final settlement still happens at expiration; the daily process is what happens on a day-to-day basis.

Daily settlement means that gains and losses from price changes in futures contracts are settled every trading day. Each day the contract is marked to the new settlement price, and the change in value is credited or debited to the trader’s margin account as variation margin. If the market moves in your favor, your margin account is funded; if it moves against you, you must provide additional funds to cover the loss. This process is handled by the clearinghouse to reduce counterparty risk and keep each party properly margined. While daily marking occurs throughout the contract’s life, final settlement still happens at expiration; the daily process is what happens on a day-to-day basis.