Forward contracts are an essential financial instrument in the world of finance. These contracts allow parties to purchase or sell an asset or commodity at a predetermined price on a future date. Forward contracts are a popular way to hedge against future price changes, but they also come with a risk.

To mitigate this risk, forward contracts are marked to market daily. This means that the value of the contract is reassessed every day based on the current market price of the underlying asset or commodity. The marking to market process ensures that the buyer and seller of the contract are aware of their current market value and can make informed decisions based on the latest market information.

The marking to market process is crucial for ensuring that the buyer and seller of the contract are not exposed to excessive risk. If the asset or commodity in the forward contract increases in value, the buyer of the contract will make a profit, and the seller will incur a loss. On the other hand, if the value of the asset or commodity decreases, the buyer will incur a loss, and the seller will make a profit.

The marking to market process is also essential for financial accounting purposes. It ensures that the value of the contract is reflected accurately in a company`s balance sheet. This process is particularly critical for companies that deal with large volumes of forward contracts. If these contracts are not marked to market, it can significantly impact a company`s financial statements and lead to inaccurate reporting.

In conclusion, forward contracts are marked to market daily to ensure that the buyer and seller of the contract are aware of their current market value and can make informed decisions. This process is essential for reducing risk, ensuring accurate financial reporting, and mitigating the impact of price changes. As such, it is an integral part of the financial market ecosystem.