Discuss the mark-to-market settlement of index futures.

Mark to Market, or Marking to Market, is when asset values are determined "according to market prices" at the end of each day in order to arrive at the profit or loss status of the parties in a futures transaction. Future contracts have two types of settlements – (Mark-to-market) MTM settlement and the final settlement. The open position of each trader is marked-to market on a daily basis. This is a mechanism by which the open positions are revalued every day and the resulting profit or loss is calculated and adjusted to margin account. If the market value of the open position indicates a loss. The trader has to pay additional mark to market margin. Similarly if the open position has gained on value, the trader receives the credit in his margin account. Marked-to market helps in setting the profit and loss position on a daily basis and ensures that the trader is never at default risk. MTM positions are calculated until the trader closes his open position or until the expiry date of the contract.