Mark-to-Market

What is Mark-to-Market (MtM)?

Process of valuing an open trade or portfolio at current market prices to show its real-time profit or loss.

Why is MtM important in commodity trading?

Because keeps traders updated on what their positions are really worth right now and helps them to:

• See profit or loss instantly

• Manage risk and margin calls

• Ensure accurate accounting

Who is responsible for MtM calculations?

The middle office is mainly responsible for MtM calculations, using market data to track the value of trades.

What is the key input for MtM?

The current market price of the commodity or financial asset at the end of the day.

Where do prices come from?

• Exchanges (e.g. ICE, CME)

• Pricing agencies (e.g. Platts, Argus),

• Broker quotes

• Models if the market is illiquid.

When is Mark-to-model used ?

• When no reliable market price exists.

• A price is calculated using a model that accounts for shipping costs, freight rates, and market conditions.

What is the MtM formula?

\text{MtM} = (\text{Current Market Price} - \text{Transaction Price}) \times \text{Volume}

What is an indexed price in physical commodity trades?

Price of a commodity that is based on a market price plus or minus an agreed extra amount, depending on the quality or terms of the deal.

What is a fixed price?

A price agreed upfront that does not change with market movements.

What is a Laycan?

The delivery window (time window when a ship must arrive at the port to load cargo).

How can you hedge pricing risk during a Laycan?

By selling futures or swaps daily in equal parts to lock in an average price over the whole period.

What is Day-to-Day (DtD) MtM change?

It is the difference in MtM value from one day to the next, showing daily gains or losses due to price movements.

What is Month-to-Date (MtD) MtM?

The total change in MtM value since the start of the current month.

What is Year-to-Date (YtD) MtM?

The cumulative change in MtM value from the beginning of the year.

What is MtM Attribution Analysis?

Analysis that explains why your trade’s value changed and which factors influenced the change and how much came from:

• Price movements

• Volume changes

• Time decay

• Other market factors

A company bought 100,000 barrels of crude oil at $95 and sold futures at $95 to hedge. Today, the market price is $100. Calculate the Mark-to-Market (MtM) for the physical trade, the hedge, and the net MtM.

MtM (physical) = (100 − 95) \times 100,000 = +500,000 USD
MtM (futures) = (100 − 95) \times (−100,000) = −500,000 USD
Net MtM = 0 USD

A trader sold 50 Brent crude futures contracts at $90. Each contract covers 1,000 barrels. Today, the market price is $88. Calculate the Mark-to-Market (MtM).

MtM = (88 − 90) × (−50 × 1,000) = +100,000 USD

What specific reports does the Middle Office typically release daily?

• MtM report: Shows the current market value of all open trades.

• Risk report: Shows how much risk the company has and if limits are being exceeded.

• P&L report: Shows the profit or loss made during the day.

• Position report: Lists all active trades and their details.

• Margin report: Shows how much money is needed to cover risks (margin calls).

What is Mark-to-Market (MtM)?

Process of valuing an open trade or portfolio at current market prices to show its real-time profit or loss.

Why is MtM important in commodity trading?

Because keeps traders updated on what their positions are really worth right now and helps them to:

• See profit or loss instantly

• Manage risk and margin calls

• Ensure accurate accounting

Who is responsible for MtM calculations?

The middle office is mainly responsible for MtM calculations, using market data to track the value of trades.

What is the key input for MtM?

The current market price of the commodity or financial asset at the end of the day.

Where do prices come from?

• Exchanges (e.g. ICE, CME)

• Pricing agencies (e.g. Platts, Argus),

• Broker quotes

• Models if the market is illiquid.

When is Mark-to-model used ?

- When no reliable market price exists. - A price is calculated using a model that accounts for shipping costs, freight rates, and market conditions.

What is the MtM formula?

\text{MtM} = (\text{Current Market Price} - \text{Transaction Price}) \times \text{Volume}

What is an indexed price in physical commodity trades?

Price of a commodity that is based on a market price plus or minus an agreed extra amount, depending on the quality or terms of the deal.

What is a fixed price?

A price agreed upfront that does not change with market movements.

What is a Laycan?

The delivery window (time window when a ship must arrive at the port to load cargo).

How can you hedge pricing risk during a Laycan?

By selling futures or swaps daily in equal parts to lock in an average price over the whole period.

What is Day-to-Day (DtD) MtM change?

It is the difference in MtM value from one day to the next, showing daily gains or losses due to price movements.

What is Month-to-Date (MtD) MtM?

The total change in MtM value since the start of the current month.

What is Year-to-Date (YtD) MtM?

The cumulative change in MtM value from the beginning of the year.

What is MtM Attribution Analysis?

Analysis that explains why your trade’s value changed and which factors influenced the change and how much came from:

• Price movements

• Volume changes

• Time decay

• Other market factors

A company bought 100,000 barrels of crude oil at $95 and sold futures at $95 to hedge. Today, the market price is $100. Calculate the Mark-to-Market (MtM) for the physical trade, the hedge, and the net MtM.

MtM (physical) = (100 − 95) \times 100,000 = +500,000 USD

MtM (futures) = (100 − 95) \times (−100,000) = −500,000 USD

Net MtM = 0 USD

A trader sold 50 Brent crude futures contracts at $90. Each contract covers 1,000 barrels. Today, the market price is $88. Calculate the Mark-to-Market (MtM).

MtM = (88 − 90) × (−50 × 1,000) = +100,000 USD

What specific reports does the Middle Office typically release daily?

• MtM report: Shows the current market value of all open trades.

• Risk report: Shows how much risk the company has and if limits are being exceeded.

• P&L report: Shows the profit or loss made during the day.

• Position report: Lists all active trades and their details.

• Margin report: Shows how much money is needed to cover risks (margin calls).

How much should you sell each day to hedge if the Laycan is 5 days and you need to sell 5,000 tons of a commodity?

You should sell 1,000 tons each day (5,000 tons ÷ 5 days).

If the prices over the 5 days are:
Day 1: $100
Day 2: $110
Day 3: $90
Day 4: $95
Day 5: $105
What price do you sell the 1,000 tons at on Day 2?

You sell 1,000 tons at $110 on Day 2.

How do you calculate the average price after selling 1,000 tons each day?

Add all the daily prices and divide by 5:
(100 + 110 + 90 + 95 + 105) ÷ 5 = $100 per ton.

What is the benefit of selling futures a little each day instead of all 5,000 tons on one day?

It spreads out the risk and averages the price, so you don’t lose money if the price suddenly drops or spikes on one day.

If the price had dropped to $80 on Day 3, how would selling in portions help?

Since you only sold 1,000 tons at $80, the other days with higher prices help balance your average, reducing the impact of the low price.