Canadian Securities Course (CSC) Level 1 Practice Exam

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What is marking to market?

Settling trades with physical goods
Setting prices based on market demand
Daily settlement of gains and losses from futures trades
Adjusting prices after the market closes

The correct answer is: Daily settlement of gains and losses from futures trades

Marking to market refers specifically to the daily settlement of gains and losses from futures trades, which is a crucial aspect of maintaining the integrity and efficiency within derivatives markets. This process involves adjusting the margin accounts of traders based on the current market value of their positions each day. By doing this, it ensures that traders can meet their financial obligations and that losses are realized promptly, thereby reducing the risk of default. The practice is essential because it provides a real-time valuation of the positions traders hold, reflecting the latest market conditions. This helps in managing risks effectively and ensures that the exchange has up-to-date records of the participants' financial standings. In summary, marking to market plays a vital role in ensuring transparency and stability in trading environments, particularly in the context of futures contracts.