CG56101 | Futures: financial futures: contracts for differences: example

In both examples below, the shares in ABC Plc stand at £5 per share at commencement.

Example 1
Example 2

Example 1

An investor expects the shares to rise, and enters into a long position over 20,000 shares. He puts up a deposit of £20,000 (20% of the full value of £100,000). The broker who is counter-party to the deal debits the investor’s account with “interest” on the unpaid balance of £80,000 at 0.75% per calendar month (£600 per month). After two months, the company pays a dividend of 2p per share, and the broker credits the account with £400 (equivalent to the dividend on 20,000 shares).

After three months the shares stand at £6.50 per share, and the investor closes out the contract. The increase in value of 20,000 shares over the life of the contract is £30,000, and this is credited to the investor’s account. The broker also charges commission of £500.

In summary, the account is as follows:

The chargeable gain is £28,100, the difference between the amount deposited and the closing balance. This can be expressed as:

If the shares had decreased in value to £4.50, the decrease in value of 20,000 shares (£10,000) would be debited from the account.

At close, the account would then be:

The allowable loss is £11,900, the difference between the amount deposited and the closing balance. This can be reconciled:

Top of page

Example 2

The investor expects the shares to fall. He enters into a short position over 20,000 shares. Once again, he deposits £20,000, 20% of the value of 20,000 shares. The broker credits “interest” of £450 per month (based on an interest rate of 0.5625% per calendar month), and debits an amount equivalent to a dividend of 2p per shares paid on 20,000 shares.

After three months, the investor closes out the contract when the share price is £3.75 per share. His account is credited with the reduction in price of 20,000 shares (£25,000).

The summarised account is:

The investor has a chargeable gain of £25,450, the difference between the amount deposited and the closing balance. This can be reconciled:

If the investor was wrong, and the shares in fact increased in value to £5.75 per shares between the opening and closing of the contract, the account would be:

The investor has an allowable loss of £14,550, the difference between the amount deposited and the closing balance. This can be reconciled as