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OTC Contracts for Difference (Cfds)
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Over the counter contracts for difference are an agreement between
the buyer and seller to exchange the difference in value of a particular
security between when the contract is opened and when it is closed.
This form of security allows parties to speculate on price movement
without owning the underlying physical. Positions can be opened for
long or short directional movement and are not subject to contract
expiry. CFD’s are a leveraged instrument with margin rates calculated
as a percentage of the notional value of the underlying instrument.
Financing charges are applied to positions held overnight and are
usually calculated at a rate slightly above a benchmark interest rate.
Short positions are paid interest at an agreed rate.
Long Position Example:
Open Position:
Purchase 2500 share CFD’s of Telstra Underlying Security (TLS)
Price $4.90
Financing Rate: (overnight rate 5.5%) + 2 %(add on by OTC provider)
= 7.5%
= 2500 X $4.90 = $12250 (full value of the position)
= $12250 X 5 %(Margin Rate) = $612.50 Margin
= 12,250 X 7.5% = $918.75/365
= $2.517 per day interest payable on the open position
(The interest calculation is based on the closing price of the security
so total interest costs associated with a position will be equal
to the cumulative interest payable at the end of each day for the
duration of the position)
Commission = $12250 X 0.125 %(OTC provider commission rate) = $15.31
Close position:
The position is held for a duration of 20 days.
Purchase price of TLS $4.90
Sale Price of Telstra $5.30
Profit on the position is calculated as follows:
Purchase price: 2500 X $4.90 = $12250
Sale price: 2500 X $5.30 = $13250
Interest Costs: $2.517(average) X 20 = $50.34
Commission: $15.31(open) + $16.563(close) = $31.873
Total Result: $13250 - $12250 - $50.34 - $31.873
Net Profit: $917.787
Short Position Example:
Sell 2500 share CFD’s on Telstra Underlying Security (TLS)
Price $4.90
Financing Rate: (overnight rate 5.5%) - 2%(deducted by OTC provider)
= 3.5%
= 2500 X 4.90 = $12250
= 12250 X 5%(Margin Rate) = $612.50 Margin
= 12250 X 3.5% = $428.75/365
= $1.174 per day interest on open short position
Commission = $12250 X 0.125 %(OTC provider commission rate) = $15.31
Close Position:
The position is held for a duration of 20 days.
Purchase price of TLS $4.90
Sale Price of Telstra $4.40
Profit on the position is calculated as follows:
Purchase price: 2500 X $4.90 = $12250
Sale price: 2500 X $4.40 = $11,000
Interest Payable to Account Holder: $1.174(average) X 20 = $23.48
Commission: $15.31(open) + $13.75(close) = $29.06
Total Result: $12250 - $11,000 +23.48 - $29.06
Net Profit: $1244.42
Next Article: Benefits
of contracts for difference
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