Daily profit and loss settlement (mark to market)

accounting

The daily profit and loss settlement (mark to market in English) is a way of accounting for gains and losses in an investment portfolio transaction made up of financial assets, valuing the accounting record of all open positions based on current market prices.

These new prices are what will determine the new guarantees that the investor will have to replace in his portfolio and will mitigate an erroneous control of the positions of the clients of financial institutions.

This model is very useful for entities to present their accounting for their earnings statements. In turn, it is a model used by many institutions since they allow measuring financial risks in real time and the leverage positions of their clients or margin calls (margin call) and allow actions to be taken so that clients comply with their obligations to cover market guarantees.

This valuation is taken into account especially in products such as financial derivatives or the purchase and sale on credit, but also in the accounting of a company where assets are recorded in the books at their real price or book value.

Example of daily profit and loss settlement

We must bear in mind that a financial institution has to liquidate the positions of its assets with the client and with the market.

  • The settlement of positions with the client is done in real time, in such a way that the client will be able to see the profit or loss of his portfolio in real time as well as its settlement in the event that he closes his outstanding positions.
  • The settlement with the market is usually done through the scoring position of the financial institution with the clearing houses as well as with the depository entities and is usually done in D + 1. The procedure is carried out through movements of global balances of all clients, where you can see the total guarantees to be provided and then the entity adjusts the guarantees correctly for each client based on the assets that it negotiates. In turn, the titles of each security that the entity has with its custodian are reconciled to verify that the delivery of the securities matches the operations of the clients.

Let's look at a very simple example of a real-time trade and its profit and loss settlement:

Pedro buys a Futures of the Eurostoxx50 at a price of 3,000 points and decides to sell it after two hours at a price of 3,020 points. To do this, it deposits guarantees of 8,000 euros, taking 10,000 euros into account and pays 2.50 euros per operation:

The settlement of the operation is as follows in the movements of the cash account:

Refund of guarantees 8,000 euros H (Credit)

Operation commission 5 euros D (Debt)

Operation profit 200 euros H (Credit)

Total balance 10,195 euros H (Credit)

We must bear in mind that the multiplier per contract of the index is 10 euros. Therefore, since Pedro has gained 20 points in the operation, we have that the benefit is 200 euros. We say that the multiplier is 10 euros because the Futures contracts have standard contractual conditions and, in this case in question, the multiplier of the Futures of the Eurostoxx50 is 10 euros, the profit formula in this example being the following:

Total profit = Operation profit * Multiplier = 20 points * 10 = 200 euros

Tags:  Commerce derivatives banking 

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