This chapter discusses contracts for differences (CFDs), which allow investors to take long or short positions on underlying assets like stocks without owning the actual assets. CFDs offer leverage, low costs, and global trading opportunities. The chapter outlines CFD trading mechanisms involving margin, marked-to-market pricing, and margin calls. It also discusses order types, financing costs, and strategies like dividend capture and pairs trading. Risks include liquidation if margin requirements are not met and potential losses greater than the initial investment due to leverage.
Describes what derivatives are and explains the differences between over-the-counter and exchange-traded
derivatives, Identify types of underlying assets on which derivatives are based, describes the participants in and use of derivative trading, describes what options are and how they are traded, and evaluate call and put option strategies for
individual and institutional investors and corporations.
5. Describe what forwards are, distinguish futures contracts from forward agreements, and evaluate
futures strategies for investors and corporations, define and describe rights and warrants, explaining why they are issued,
Carley Garner discussing the necessity of being aware of key differences in stock options and options on futues as well as a fundamental account of long and short option strategies. To listent to a recorded presentation of this slide show, visit: http://tinyurl.com/CGrecording
http://www.options-trading-education.com/24043/straddle-options/
Straddle Options
When an options trader is not sure which way prices will go in a volatile market he or she often uses straddle options. Straddle options both long and short let a trader stake out potentially profitable positions for both rising and falling markets. Which route a trader takes in using straddle options will depend on whether he wants to buy or sell options contracts.
Going Long
A long straddle is buying both a call and a put on the same stock with the same expiration date. In a long straddle options strategy the worst a trader can do is lose the cost of the premiums paid for the call and the put if the stock does not change price. These straddle options have potentially unlimited potential if the stock price changes significantly, up or down.
Long Straddle Calls
If the stock price goes up the trader exercises the call option, sells the stock at the spot price and buys at the strike price. The profit is the price of 100 shares per contract at the spot price minus the strike price, minus the cost of premiums on both put and call options.
Long Straddle Puts
If the stock goes down in price the trader exercises the put option and sells the stock at the strike price and buys at the new, lower market price, the spot price. The profit will be the price of 100 shares per contract at the strike price minus the spot price minus the premium cost of both put and call options.
This strategy is useful in a volatile and unpredictable market. It carries twice the overhead of a call or put trade. But, the trader cuts down on the risk of missing out on an unexpected market move by covering both up and down eventualities. The only time when a trader loses with a long straddle is when the stock price does not change and then he is only out the cost of two options contracts.
Going Short
A short straddle strategy is selling both a put and a call on the same stock with the same options expiration dates. If the stock does not go up or down the options trader gains two premiums, one for the call and one for the put. Straddle options like these can be cash cows for a trader who has done his homework and only sells contracts on stocks that have very little likelihood of going up or down.
Volatile Markets and Big Losses
Whereas a long straddle is ideal for a volatile market a short straddle should only be used in a quiet market. As with all selling of options contracts the losses can be enormous if a stock price changes greatly. Which is why selling options contracts is so commonly limited to traders with very deep pockets.
Volatile Markets and Big Gains
Volatile markets bring us back to the long straddle. This is the ideal strategy for a market that is crazy in its volatility.
2016 Candidate Guide and Early Voting GuideGordon Smith
The Buncombe County Democratic Party has produced a guide to early voting sites/locations as well as a candidate guide to clue you in to every Democrat on this year's ballot. Please share it far and wide!
Describes what derivatives are and explains the differences between over-the-counter and exchange-traded
derivatives, Identify types of underlying assets on which derivatives are based, describes the participants in and use of derivative trading, describes what options are and how they are traded, and evaluate call and put option strategies for
individual and institutional investors and corporations.
5. Describe what forwards are, distinguish futures contracts from forward agreements, and evaluate
futures strategies for investors and corporations, define and describe rights and warrants, explaining why they are issued,
Carley Garner discussing the necessity of being aware of key differences in stock options and options on futues as well as a fundamental account of long and short option strategies. To listent to a recorded presentation of this slide show, visit: http://tinyurl.com/CGrecording
http://www.options-trading-education.com/24043/straddle-options/
Straddle Options
When an options trader is not sure which way prices will go in a volatile market he or she often uses straddle options. Straddle options both long and short let a trader stake out potentially profitable positions for both rising and falling markets. Which route a trader takes in using straddle options will depend on whether he wants to buy or sell options contracts.
Going Long
A long straddle is buying both a call and a put on the same stock with the same expiration date. In a long straddle options strategy the worst a trader can do is lose the cost of the premiums paid for the call and the put if the stock does not change price. These straddle options have potentially unlimited potential if the stock price changes significantly, up or down.
Long Straddle Calls
If the stock price goes up the trader exercises the call option, sells the stock at the spot price and buys at the strike price. The profit is the price of 100 shares per contract at the spot price minus the strike price, minus the cost of premiums on both put and call options.
Long Straddle Puts
If the stock goes down in price the trader exercises the put option and sells the stock at the strike price and buys at the new, lower market price, the spot price. The profit will be the price of 100 shares per contract at the strike price minus the spot price minus the premium cost of both put and call options.
This strategy is useful in a volatile and unpredictable market. It carries twice the overhead of a call or put trade. But, the trader cuts down on the risk of missing out on an unexpected market move by covering both up and down eventualities. The only time when a trader loses with a long straddle is when the stock price does not change and then he is only out the cost of two options contracts.
Going Short
A short straddle strategy is selling both a put and a call on the same stock with the same options expiration dates. If the stock does not go up or down the options trader gains two premiums, one for the call and one for the put. Straddle options like these can be cash cows for a trader who has done his homework and only sells contracts on stocks that have very little likelihood of going up or down.
Volatile Markets and Big Losses
Whereas a long straddle is ideal for a volatile market a short straddle should only be used in a quiet market. As with all selling of options contracts the losses can be enormous if a stock price changes greatly. Which is why selling options contracts is so commonly limited to traders with very deep pockets.
Volatile Markets and Big Gains
Volatile markets bring us back to the long straddle. This is the ideal strategy for a market that is crazy in its volatility.
2016 Candidate Guide and Early Voting GuideGordon Smith
The Buncombe County Democratic Party has produced a guide to early voting sites/locations as well as a candidate guide to clue you in to every Democrat on this year's ballot. Please share it far and wide!
There are many different ways to trade and invest in the market such as physical stocks (delivery based),
physical bonds (delivery based certificates), physical commodities etc., as well as others such as options,
forwards, futures and so on. And CFD is being one of such instruments - perhaps the most flexible
instrument that can replicate all the others etc. So what is a CFD?
The law firm's investment management practice represents a full range of U.S. domestic and non-U.S. clients
in all aspects of their organization and operations. Our clients include start-up investment managers/advisers and
investment funds, seasoned private equity and venture capital professionals and established/industry-recognized investment companies and institutions.
Understand the basis of Derivative market, types of derivatives, settlement cycle, difference between delivery and future, etc. To know more or trade in derivatives log on to www.karvyonline.com or speak with a financial advisor on 18004198283.
A glance through the finance pyramid for investments. This presentations gives an insight to the various products & services that Asit C Mehta Investment Interrmediate Ltd. Get to know about the financial terms that will help you plan your investments.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
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1. finlogIQ
Knowledge for financial IQ
STRICTLY PRIVATE AND CONFIDENTIAL
Chapter 17
Contracts for Differences (CFDs)
August 2012
2. Chapter summary and outline
This chapter outlines the history, features and trading
mechanisms of CFDs, trading opportunities, trading strategies,
governance and risks of investing in CFDs.
Chapter outline:
• Introduction to Contracts for Difference
• Trading mechanisms for CFDs
• Global trading opportunities
• CFD trading strategies
• Risks of investing in CFDs
finlogIQ 2
3. Introduction To CFDs
• First traded over the counter (“OTC”) in the equity swap market:
– Institutional investors used them as a cost effective way of hedging their equity
exposures
– Arbitrageurs and hedge fund managers use them for market neutral strategies
• CFDs are effective if you have negative outlook on the market or a
particular stock, without the need to borrow stock to short sell
• CFDs enable investors to:
– Take long and short equity positions
– Benefit from leverage
– With no actual change of ownership, investors get exposure to the real-time
performance of underlying stock
– Also entitled to stock dividends and other corporate actions
– But CFDs investors are not entitled to voting rights
• Has its origin in UK and popular with investors in Belgium, Germany and
Ireland
• CFDs are available in Australia, Hong Kong, Singapore, and South Korea
but not available in the USA due to regulatory restrictions
finlogIQ 3
4. What Are Contracts for Differences (CFDs)
• They are derivative products - contract involves two parties: the buyer and
the seller
• Buyer or seller with positive or negative view of the market, takes a position
on asset price movements without the ownership of the underlying asset.
• Upon maturity, there is a cash settlement where seller pays the buyer the
difference between the opening price and closing price of the contract
• Terms of a CFD:
– Underlying asset – it can be a stock, an index, a commodity, a currency, etc.
– Price of the underlying asset – at the time the contract commences
– Number of units of the underlying asset specified in the CFD
– Expiry period, if any
– Settlement currency
finlogIQ 4
5. Characteristics and Features of CFDs
Leverage
• Margin requirement is a fraction of the underlying asset value
Flexibility
• Easy to take long and short positions
Low cost
• Brokerage commissions and finance charges tend to be low and highly
competitive. In Singapore, there is no stamp duty to be paid.
Transparency
• Underlying asset is known at the outset
• Can be easily tracked
Ease & Simplicity
• Investors can trade via personal broker or online
• CFD providers are brokerage firms
− Members of exchanges and have robust CFD online trading platforms
finlogIQ 5
6. Characteristics and Features of CFDs - 2
No expiry date
• Open position can be rolled over and held as long as the investor wishes
Access to Asset Classes
• Individual stocks, market indices, government treasuries, foreign exchange,
commodities and exchange-traded funds (ETFs).
• New asset classes e.g. carbon emissions and market volatility indices.
Access to Global Investments
• Not limited to domestic Singapore securities
• Trade worldwide on various Exchanges
Cash Settlement
• Cash settled products
• No delivery of an underlying instrument
Corporate Actions
• Stock CFDs investor holding a long position will get cash dividends on the
underlying stock and participate in stock splits and the other corporate
actions, just as if the investor owned the physical stock.
• But not entitled to any voting rights
finlogIQ 6
7. CFD Business Models
Three main business models:
Market-Maker
• Makes a market in CFDs, and
• Quotes its own bid-ask price
Direct Market Access (DMA)
• Order goes through the CFD provider‟s platform
• Investor access the market directly
• Price paid is determined by the market of the underlying asset
Exchange-traded CFDs
• Traded on an exchange just listed stocks
• This type of CFD is not common and is currently available in Australia
finlogIQ 7
10. Trading Mechanisms of CFDs
Margin
• To initiate a CFD trade, investor does not have to pay the full underlying
value
• Pays a fractional sum in cash (or initial margin)
– Computed as a Percentage of the overall value of the underlying asset
– Varies depending on the type of security, asset class, country regulations and the
specific requirements of the CFD provider.
Example:
• A CFD on Company A‟s shares requires a 10% initial margin.
• The share price is $2 and the total value for 10,000 shares = $2 x 10,000 =
$20,000.
• As the margin required is 10%, the investor has to put up a cash deposit of
only $2,000 as the initial margin at the time of opening his position.
• This effectively gives the investor 10 times leverage on the invested sum.
finlogIQ 10
11. Trading Mechanisms of CFDs - 2
Marked-to-Market
• CFD‟s value varies with the price of the underlying asset in real-time.
• At the end of each trading day, any gain (or loss) is added to (or subtracted
from)
– This is called “marked-to-market”
Margin Call
• If the balance in the investor‟s account falls below a stipulated level called
“maintenance margin”
– Investor receives “Margin call” to top up the account to restore the account
balance to the level of “initial margin”
– If unable to meet the margin call -> “liquidation”
• Provider must inform the investor, at establishment of CFD account about:
– Margin requirements, margin limits, and liquidation procedures
– Investors must be familiar with these procedures stated in Risk Disclosure
Statement (“RDS”)
finlogIQ 11
12. Trading Mechanisms of CFDs - 3
Liquidation
• The CFD provider may liquidate the investor‟s position if
– account balance is below the level of the maintenance margin, and
– Funds to restore the margin position are not received within the stipulated time
frame.
• Forced selling of the investor‟s CFD holdings
• The liquidation:
− May be for entire CFD holdings or
− Partial to extend that number of contracts force sold is sufficient to cover the
shortfall and have the margin level restored.
− The investor is liable for any shortfall, loss and expense as a result of the
liquidation.
finlogIQ 12
13. Trading Mechanisms of CFDs - 4
Orders and Stops
• Order can be placed before, during and after trading hours
• All orders are considered to be Good Till Cancelled (GTC) unless stated
• Orders: In Singapore there are 3 types of orders for equity CFDs:
– Limit Order: An order to transact at a limit price or better
– Market to Limit Order
• Order to buy or sell equity CFDs at the market price at the time the order is
placed and executed.
• There is no guarantee that the quoted price at the time the order is placed
will be achieved as the price may be different when the order is executed.
• When the order is executed, it may be filled in total or partially. If partially
filled, any unfilled part will remain open in the market at the price where the
previous part of the order was filled.
– Market Order
− Order to buy or sell a stock at the current market price
− Order will be done at the best price that the market can offer
finlogIQ 13
14. Trading Mechanisms of CFDs - 5
• Contingent Orders (Stop-Loss/ Stop Entry)
– Orders that will automatically be generated when specific market conditions are
met, e.g. Stop-Loss or Stop Entry
– Stop Loss Order
• An order that is contingent upon the stop price being reached.
• Used by traders to cut a losing position at a price worse than the current
prevailing price or protect an existing profit (Trailing Stop) once a pre-
determined price is traded.
– Stop Entry
• Contingent orders to place Stop Entry orders.
• When exiting a short CFD position, a stop order (Buy Stop) can be used to
set a stop-loss target on the position at a price higher than the current
prevailing price.
• A long CFD investor can place a (Buy Stop) order that can be used to enter
the market at a higher price than the current prevailing price.
• Using a stop in this instance allows entry into the market when the investor
believes the share price has moved through a break out point in its trading
range and will then continue to rise.
• The reverse applies for a Sell Stop.
finlogIQ 14
15. Trading Mechanisms of CFDs - 6
Contingent Orders (cont)
• Use of stop loss
– Is a trading strategy that can mitigate some of the risks involved in trading CFDs.
– Allows a stop Loss price at which the open position will be automatically closed
out
– If the underlying asset on which the investor is trading reaches a certain price,
the position will be closed out.
– Use of this strategy can be risky
– Even if a stop-loss price has been set, the CFD provider may not always execute
the stop-loss order at the price that has been set
– May happen in volatile market conditions - price jumps and there is no
transaction taking place at the set order price
– Some providers offer additional premium service called “guaranteed stop-loss”
whereby the stop loss will always be executed when the underlying asset
reaches your set price.
Order validity
• Good till cancelled (“GTC”) – order must be manually cancelled
• End of Day (EOD) – order only valid on the day it is placed
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16. Financing
• CFDs are subject to other transaction costs such as daily financing charges,
commissions and Goods and Service Tax (“GST”).
• Also a charge whenever there is a rollover of a contract.
Financing Charge
• Investors incur a financing cost (derive a benefit) for either long or short
CFD position
• As CFD requires a margin payment which is only a fraction of the total
capital outlay, investors are essentially borrowing to enjoy the exposure of
going long in the underlying shares.
• Interest charges (reflect the cost of borrowing) and usually applied at an
agreed rate based on some interest rate benchmark, computed on a daily
bases and charged for the number of days the position is kept open
• For short position, may receive interest in lieu of the deferring sale proceeds
• In addition provider may charge interest in view of the borrowing costs
incurred in allowing the „short‟ transactions
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17. Financing - 2
Commission
• Dealer firms charge commission for the CFD transactions, which is usually
a percentage of the total value of the underlying asset, subject to a
minimum sum.
GST
• Commission charged by the dealer firm is subject to GST
Rollover of Contract and Rollover Charges
• CFDs have an Expiry date which is determined by the CFD provider
• Upon expiry, the investor can continue to maintain his position by trolling
over the contract
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18. Financing - 3
Example: CFD Costs
• An investor buys a CFD contract on Company F. The price of the share on
opening day is $2.00. After 10 days, the stock price rises to $2.20. What are
the total expenses incurred and net profit?
• Company : Company A
• Quantity : 10,000
• Commission = 0.4%
• GST (Commission) = 7%
• Financing = 5% per annum
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20. Going Short
Example 1:
• An investor shorts a CFD contract on Company G. The price of the share
on opening day is $3.30. After 5 days, the stock price falls to $3.10. The
margin requirement for the stock is 20%. What are the net profit and
investment returns (ROI)?
• Quantity : 10,000
• Commission = 0.40%
• Margin requirement = 20%
• GST (Commission) = 7%
• Financing = 6% per annum
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21. Going Short - 2
Example 1 (cont): Profitable (Positive) Outcome
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22. Going Short - 3
Example 2:
• An investor shorts a CFD contract on Company H. The price of the share on
opening day is $3.30. After 5 days, the stock price rises to $3.45. The
margin requirement for the stock is 20%. What are the net profit and
investment returns (ROI)?
• Quantity : 10,000
• Commission = 0.40%
• Margin requirement = 20%
• GST (Commission) = 7%
• Financing = 6% per annum
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23. Going Short - 4
Example 2 (cont): Loss (Negative) Outcome
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24. Corporate Actions & Rights Issue
Corporate Actions – Cash Dividends
• Dividends will be credited or debited based on the investor‟s CFD position.
Investors with long positions in Stock CFDs will receive a dividend credit
while those with short positions will have the amount debited from their
account.
Corporate Actions – Stock Splits, and Reverse Splits
• The quantity and price adjustment will be made in the investor‟s account to
reflect the market equivalent.
Corporate Actions – Scrip Dividends, Bonus Issues, Right Issues
• The CFD investor may or may not be entitled to them.
• For bonus issues, non-cash dividends and rights, the client may not receive
these entitlements and the CFD provider may close off all open positions
before the ex-date.
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26. Global Trading Opportunities
• Trading Share CFDs
• Trading Index & Sector CFDs
• Currencies
• Commodities
• Government Treasuries
• Exchange-Traded Funds (“ETFs”)
• Others –new indices such as Carbon Emissions and Market Volatility (VIX)
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27. CFD Trading Strategies
Trading for Dividend (Dividend Stripping / Dividend Capture)
• Long position in a stock CFD gives investors benefit of receiving dividends
declared by the company.
– Conversely investor who has a short position has to pay out the amount of
dividend declared.
• Can profit from good yielding stocks by timing the trade of the stock CFD
– When the stock goes ex-div, its price is theoretically supposed to fall by the divd.
amount and there is no net difference in the total value to the shareholder.
– However, the stock price does not always behave this way.
– When sentiment is positive or the stock is rising due to positive momentum, the
stock price does not fall by the full amount of the divd. and may even get back to
its pre-divd level quickly.
• A CFD trader can exploit such market anomalies and make a tidy profit by
capturing the stock dividend.
– He buys the CFD before the ex-div date and closes his position shortly
thereafter, before the share price has fully adjusted to the theoretical ex-div price.
– Look out for companies that have good dividend payouts and monitor them to
select the right stocks that offer opportunities for a divd. stripping opportunity
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28. CFD Trading Strategies - 2
Trading in Pairs
• CFDs pairs trading involves taking two CFD positions - 1 long and 1 short
• Objective of this strategy is to exploit a perceived deviation in the underlying
share prices from historical trends and the likelihood of price reversion to
the normal trend in the near future
• Strategy is “market-neutral” as direction of the overall market should not
affect the investment position‟s overall outcome
– Aims to remove the market risk as the long and short positions will neutralize
each other
– not necessary for each position to yield a profit as the result will be positive even
if only one is profitable and exceeds a potential loss on the other
– the investor‟s gain is based primarily on stock selection as overall
outperformance depends on the returns on the long position (undervalued) over
the short position (overvalued)
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29. CFD Trading Strategies - 3
Trading in Pairs (cont..)
• Strategy is not without risk or costs
• Sometimes, the anomalies between the overvalued and undervalued
underlying stock may persist for long periods without converging and the
investor may not realize his arbitrage profits quickly
• The markets may move against the investor and one or both sides of the
pairs trade may move the wrong way
• As a result, the loss may overwhelm the profitable leg of the trade and leave
the investor with a negative return overall
• Since investor taking two positions – one long and one short, trade will
involve double commissions and finance charges
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30. CFD Trading Strategies - 4
Trading in Pairs (cont..)
• Many strategies and variations possible for trading equity pairs:
• Industry Sector Plays
– A play on two companies in the same sector, one that is undervalued or has a
positive outlook (long position) and the other is overvalued or has a pessimistic
outlook (short position).
• Statistical Arbitrage
– Based on quantitative analysis
– Two companies that have a strong historical correlation and price pattern but
recent short-term market movements indicate a deviation from the trend
– Investors believes there will be a “mean reversion” and pattern reverts to norm.
• Merger Arbitrage
– After a merger announcement, a trader can
• Go long the target company if he expects further upside price movement
• Go short in the acquirer‟s stock.
– Main risk – “deal risk”
• Risk that the announced deal may fail and not be completed
• Investor facing potential loss on both the long and short legs
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31. CFD Trading Strategies - 5
Trading in Pairs (cont..)
• Equities Indices
– Select individual stocks for pairs trading (risky if stocks are illiquid)
– Alternatively, use equity indices as they can be easier to monitor for trends and
movements while offering deeper liquidity to the trader
• Commodities
– Same commodities class (ie Brent vs WTI or gold vs silver)
– Process chain of a commodity – “crack spreads” (unrefined vs refined products)
– Maturity dates for the same commodity (ie “calendar spreads”)
• Involves forecasting demand or supply shifts by trading different expiration
dates
– Global macro strategies (based on econ growth, inflation, weather trends)
• Fixed Income
– Trading government bonds
• Interest Rate Differentials
– Capital seeks the highest return and “carry” traders look for the most appealing
yield differential where they borrow in one country and invest in another country
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32. Risks of Investing in CFDs
Leverage Risk
• CFDs are leveraged product as it is traded on margin
• Initial margin is percentage of the contract value
• Small changes in the underlying asset can have significant impact on
trading returns as gains/losses on a leveraged product are magnified
• Daily marking-to market and margin calls
– May demand that the investor put up more money at short notice
– If the investor is unable to meet the margin call, the position may be forced sold
Market Volatility (Underlying Instrument)
• Investors may take long/short CFD position - intention of making a profit
when the price of the asset rises/falls
• Closing a CFD position while the underlying asset is subject to a corporate
action may result in delays to the investor receiving any proceeds or a credit
entry to his account or even the possibility of not being able to get any price
quotes to close out positions.
• Smaller international markets may have lower trading volumes – increases
risk that the liquidity of the CFD maybe poor
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33. Risks of Investing in CFDs - 2
CFD Model Risk (Direct Market Access vs. Market-Maker)
• Market maker model
– Liquidity and efficient pricing depends CFD provider‟s ability to
• make a market by ensuring adequate supply to meet investor demand
• keep a tight bid-ask spread so that investors trade in a cost efficient manner
– Discretion on the bid-ask spread lies with the CFD provider and is not
transparent to investors.
• Direct Market Access (“DMA”) model:
– pricing is transparent as the CFD trade is based on the underlying assets‟ market
price which is directly observable
– Buy-Sell order goes through the CFD provider‟s platform
– Investor gets access to the market directly in which the price paid is determined
by the underlying market.
• Exchange-traded CFDs are transacted on a stock exchange
– Orders are placed through stock brokers who have access to the exchange.
– Fully transparent to the investor
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34. Risks of Investing in CFDs - 3
Counterparty Risk
• Present when dealing with another entity (counterparty) in a transaction
• When buying or selling a CFD
– CFD provider becomes the counterparty
– If CFD provider is unable or unwilling to meet his contractual obligation, due to
financial or other difficulties, this can have an impact on the investor
• Exception: exchange-traded CFDs
Liquidity Risks
• If not enough trades made in market for an underlying asset (due to lack of
liquidity, or trading may be halted or suspended)
– CFD provider may either decline to fill the investor‟s trades, or only agree to
process the trade at an inferior price, which may leave the investor with an open
CFD position that he is unable to close.
– E.g. Periods of high market volatility or low turnover when it may be difficult or
even impossible to buy or sell (close out) existing positions.
• For international assets: Changes in the economic, political and regulatory
environments in a country or region can cause demand and supply of an
underlying to rise or fall suddenly, making CFDs more volatile
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35. Risks of Investing in CFDs - 4
Currency Risks
• Transactions in foreign currency-denominated instrument different from the
investor‟s base currency gives rise to foreign exchange risk
Financing Cost
• Investor must take into account all related costs involved: brokerage
commissions, account maintenance fees and financing costs.
• CFD provider will charge the investor interest for providing him with
financing.
– Interest to be charged on the full amount of the value of the CFD position,
computed on a daily basis, based on a spread over LIBOR or another market
benchmark, as disclosed and agreed to between the CFD provider and investor.
– Client is exposed to interest rates movements.
– If the interest rates rise, the financing cost for the CFD investor goes up.
• This raises the total holding cost of his investment position and erodes the
eventual investment returns.
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