CFD Examples
In this example we show an index based CFD. The S&P500 Index is at 1093.9. We believe that the Index will go down and so decide to take a 'short' position. Our CFD broker is quoting 1093.7 bid and 1094.1 offer.
| Step 1 Opening a position | |
| Sell 10 S&P500 CFDs at bid price | 10 x $1093.7 = $10,937 |
| Margin requirement is open position x margin percentage. Typical value for major indices is 0.5% | 10,937 x 0.005 = $54.68 |
| Commission – typically no commission is charged on index CFDs | |
| Step 2 Overnight Financing | |
| To hold a position a financing charge is made, however as we are holding a short position we will instead receive the financing. The rate is normally based on a benchmark rate per cent like LIBOR, from this we subtract the broker margin and divide by 365 to get the daily financing. For simplicity lets assume the US interest rate is 4% and the broker margin is 2%. | $10,937 x (0.04 - 0.02) / 365 = +$0.60 |
| Step 3 Closing the position | |
| The next day the S&P has dropped by 10 points to 1083.7 bid and 1084.1 offer | |
| Our trade has moved in our favour and we decide to take profit and close the position | |
| Buy back the position at the lower price | 10 x 1084.1 = $10,841 |
| The position is now closed and so margin requirement is now zero | |
| Gross profit is difference between opening position and closing the position | $10,937 - $10,841 = $96.00 |
| Net profit is gross profit less costs. In this example financing is actually positive and there are no other costs. So we get a credit of | $0.60 |
| Profit and Loss shows a Profit after costs | $96.00 + 0.60 = $96.60 |
In summary we have had to deposit $54.68 to cover margin on this trade and made a profit of $96.60. If the S&P 500 Index had risen instead by 10 points we would have sustained a loss of $95.40 ($96.00 + Costs). Note that the amount of gain or loss was bigger than the margin requirement. In other words, you would have gained or lost more money than you deposited.
