The practice which is used to revalue a financial instrument, in general. In the context of derivatives, marking to market involves readjusting the value or price of a derivative instrument, position or portfolio to correspond to current market prices. This helps monitor risk more effectively by accounting for profits and losses on a daily basis, reflecting whereby the fair value of a given instrument. It also helps confirm that margin requirements have effectively been met.
For example, parties to a futures contract have to deposit a specified amount in a margin amount to ensure mutual respect of contractual obligations. It is a given fact that the price of the asset underlying a futures contract changes over time, and therefore the current price is used to calculate whether the margin account has sufficient funds to cover the new settlement price. If it turns out, after marking to market, that the margin account has fallen below it maintenance level, a margin call will, then, be initiated, requiring the deposit of additional money to top up that account again.
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