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E: cfd@mfglobal.com.sg
Contracts for Difference (“CFD”)
What is "Contracts for Difference"?
A Contract for Difference, or CFD, is a contract designed
to reflect the price movement of a share, but where the underlying cash
equity does not change hands. In short, you can take positions in the
stock without having to buy or sell the actual share.
In trading CFDs, you can receive all the (potential) economic returns of the performance of the underlying stock without having to settle the principal. Instead of having to pay for the full amount of the underlying equity, you can leverage your positions by maintaining a margin of typically 10% (variable depending on volatility) of the total value of the trade.
Price Quotes
CFD price quotes are identical to those of the underlying
cash equity. Consequently, the liquidity of the CFD is the same as the
liquidity of the underlying stock.
Trading Hours
The CFDs market hours are the same as that of the underlying
cash equity market hours.
Margin Requirements
The margin required for trading CFDs is typically 10%
of the total value of the trade. (Margin requirements may vary depending
on volatility of the market and/or the particular underlying stock.) Positions
are marked-to-market daily and the initial margin has to be maintained.
Dividends
We pay dividends (net of withholding tax) on long positions & collect dividends on short positions.
Corporate Action
Rights or obligations on account of corporate action
will not accrue in respect of CFDs. However, generally, all corporate
action that affects a stock will be reflected in the value of the CFD.
Examples Of Trading CFDs:
Example 1
A client believes that the price of AAA will rise in the short term. The current price is USD 50 per share. Assuming that the client intends to invest USD 100,000. The illustration below compares the outright purchase of 2,000 shares of AAA to purchasing CFDs on AAA.
Assumptions:
Positions are closed after one month when the shares are trading at
USD 60
Financing is 1.50% p.a. over LIBOR
Margin requirement (shares trading) 50%
LIBOR on USD is 1.50%
Commission on a CFD trade is USD 0.07/share
Commission on a stock trade is 0.30%
Margin interest is 5.5% p.a.
| Cash trading (USD) | Margin trading (USD) | CFDs trading (USD) | |
| Value at risk | 100,000 | 100,000 | 100,000 |
| Cash outlay | 100,000 | 50,000 | 10,000 |
| Gearing | NIL | 2 times | 10 times |
| Purchase value | 100,000 | 100,000 | 100,000 |
| Add costs: | |||
| Commission | 300 | 300 | 140 |
| Financing cost | NIL | 229 | 250 |
| Total costs | 300 | 529 | 390 |
| Net purchase value | 100,300 | 100,529 | 100,390 |
| Sales proceeds | 120,000 | 120,000 | 120,000 |
| Less costs: | |||
| Commission | (360) | (360) | (140) |
| Net sales proceeds | 119,640 | 119,640 | 119,860 |
| Net profit | 19,340 | 19,111 | 19,470 |
| Profit % | 19% | 38% | 195% |
Example 2
A client believes that the price of BBB will fall in the short term. The current price is USD 50 per share. Assuming that the client has equity of USD 50,000. The illustration below compares the outright short selling of 2,000 shares of BBB to selling CFDs on BBB.
Assumptions:
Positions are closed after one month when the shares are trading at
USD 40
Margin required for short selling of shares is 50%
Interest earning is 1.25% p.a. below LIBOR
LIBOR on USD is 1.50%
Commission on a CFD trade is USD 0.07/share
Commission on stock trade is 0.30%
Cost of borrowing shares is 2.00% p.a.
| Shorting Shares (USD) | CFDs Trading (USD) | |
| Value at risk | 100,000 | 100,000 |
| Cash outlay | 50,000 | 10,000 |
| Gearing | 2 times | 10 times |
| Sales proceeds | 100,000 | 100,000 |
| Less cost: | ||
| Commission | 300 | 140 |
| Borrowing costs | 167 | NIL |
| Total costs | 467 | 140 |
| Add interest income | NIL | 21 |
| Net sales proceeds | 99,533 | 99,881 |
| Repurchase value | 80,000 | 80,000 |
| Add costs: | ||
| Commission | 240 | 140 |
| Net repurchase value | 80,240 | 80,140 |
| Net profit | 19,293 | 19,741 |
| Profit% | 39% | 197% |
Pairs Trading
Client wishes to profit if AAA outperforms BBB and has
no opinion about market direction. Current market prices are AAA at USD
30 and BBB at USD 20. This could be expressed as a ratio of 30/20 or 1.5.
In other words, one AAA is equal to 1.5 of BBB. If client buys AAA and
sells an equivalent in value of BBB, he would profit as long as the ratio
improves.
Buys CFDs on 2,000 shares of AAA at USD 30 (value USD 60,000)
Sells CFDs on 3,000 shares of BBB at USD 20 (value USD 60,000)
Some time later, AAA is trading at USD 50 and BBB at
USD 30. The new ratio is 1.67 and this suggests that the client has made
a profit.
Sells CFDs on 2,000 shares of AAA at USD 50 (profit of USD 40,000)
Buys CFDs on 3,000 shares of BBB at USD 30 (loss of USD 30,000)
The above strategy has generated a gross profit of USD 10,000.
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