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
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:
| Description | Amount |
|---|---|
| Deposit | £20,000 |
| Less “interest” - 3 months @ £600 pm | £ 1,800 |
| - | £18,200 |
| Plus “dividend” | £ 400 |
| - | £18,600 |
| Plus increase in value of shares | £30,000 |
| - | £48,600 |
| Less commission | £ 500 |
| Final balance | £48,100 |
The chargeable gain is £28,100, the difference between the amount deposited and the closing balance. This can be expressed as:
| Description | Deduction | Amount |
|---|---|---|
| Increase in value of 20,000 shares | - | £30,000 |
| Plus “dividend” equivalent | - | £ 400 |
| - | - | £30,400 |
| Less “interest” charges | £1,800 | - |
| Commission | £ 500 | £ 2,300 |
| Net gain | - | £28,100 |
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:
| Description | Amount |
|---|---|
| Opening deposit | £20,000 |
| Less “interest” as above | £ 1,800 |
| - | £18,200 |
| Plus “dividend” | £ 400 |
| - | £18,600 |
| Less decrease in share price | £10,000 |
| - | £ 8,600 |
| Less commission | £ 500 |
| Closing balance | £ 8,100 |
The allowable loss is £11,900, the difference between the amount deposited and the closing balance. This can be reconciled:
| Description | Amount |
|---|---|
| Decrease in price of 20,000 shares | £10,000 |
| Plus “interest” charges | £ 1,800 |
| Commission | £ 500 |
| - | £12,300 |
| Less “dividend” | £ 400 |
| Net loss | £11,900 |
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:
| Description | Amount |
|---|---|
| Opening balance | £20,000 |
| Plus “interest” for three months | £ 1,350 |
| - | £21,350 |
| Less “dividend” | £ 400 |
| - | £20,950 |
| Less commission | £ 500 |
| - | £20,450 |
| Plus reduction in share price | £25,000 |
| Closing balance | £45,450 |
The investor has a chargeable gain of £25,450, the difference between the amount deposited and the closing balance. This can be reconciled:
| Description | Deduction | Amount |
|---|---|---|
| Decrease in share price | - | £25,000 |
| Plus “interest” credits | - | £ 1,350 |
| Net gain | - | £26,350 |
| Less “dividend” | £400 | - |
| Commission | £500 | £ 900 |
| - | - | £25,450 |
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:
| Description | Deduction | Amount |
|---|---|---|
| Opening balance | - | £20,000 |
| Plus “interest” credits | - | £ 1,350 |
| - | - | £21,350 |
| Less “dividend” charge | £ 400 | - |
| Commission | £ 500 | - |
| increase in value of 20,000 shares | £15,000 | £15,900 |
| Closing balance | - | £ 5,450 |
The investor has an allowable loss of £14,550, the difference between the amount deposited and the closing balance. This can be reconciled as
| Description | Amount |
|---|---|
| increase in value of the shares | £15,000 |
| less “interest” credits | £ 1,350 |
| - | £13,650 |
| plus “dividend” charge | £ 400 |
| commission | £ 500 |
| - | £14,550 |