Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

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What does it mean when a futures contract is marked-to-market?

The contract value is adjusted at the end of each trading day
The contract is permanently closed after the trade
The contract price is fixed at the agreement date
The contract allows the holder to avoid margin calls

The correct answer is: The contract value is adjusted at the end of each trading day

When a futures contract is marked-to-market, it refers to the process where the contract value is adjusted at the end of each trading day to reflect the current market prices. This means that gains and losses are realized on a daily basis, affecting the margin account of the traders involved. By adjusting the contract value daily, traders can see how their positions are performing in real-time, which helps manage risk and liquidity. This practice is essential in futures trading, as it allows for timely settlement of profits or losses, thus maintaining the integrity of the trading system. It ensures that traders have enough margin to cover potential losses, reducing the likelihood of default. The other options do not accurately describe the mark-to-market process. Closing the contract after the trade, fixing the contract price at the agreement date, or avoiding margin calls all contradict the fundamental principle of adjusting values in line with market conditions throughout the lifespan of the futures contract.